Simplifying Payments on Account: A Guide for Small Business Owners

Have you recently received a reminder from HMRC about your upcoming payment on account due by July 31st? As a small business owner, understanding payments on account is essential for navigating tax compliance. As the deadline approaches, let's explore this aspect of taxation and who it applies to.

What are payments on account?

If you are self-employed or receive income without tax deductions, HMRC may require you to make payments on account to cover your future tax bill. The payments are split into two instalments, due by January 31st and July 31st, respectively, and are based on your previous years tax bill. A payment on account pertains to your earnings made during the tax year, which runs from April 6th of the previous year to April 5th of the current year. Therefore, when the payments on account are due, you have essentially already earned this money. While it may seem like an additional financial obligation, understanding that these payments relate to earnings which you have already made empowers you to plan and manage your tax responsibilities efficiently throughout the year. This way, you can avoid any surprises and ensure compliance with HMRC regulations.

Who needs to make payments on account?

If your tax bill exceeds £1,000 and less than 80% of your tax liability is covered through tax deductions at source (e.g., PAYE), you are likely to be required to make payments on account. It's important to note that the first payment on account can catch some people off guard, as it effectively requires you to pay 150% of your tax bill in one go. Understanding your individual tax situation and consulting with a professional bookkeeper is crucial for ensuring compliance.

At Saltbox Bookkeeping, we highly recommend that our clients file their tax returns as early as possible. There are several advantages to early filing:

1. Effective Planning and Budgeting: Filing your tax return early provides a clear picture of your tax liability, enabling you to plan and budget more effectively for the year ahead.

2. Avoiding Penalties: Early filing minimizes the risk of penalties for late submission, giving you peace of mind and ensuring your tax obligations are taken care of promptly.

If you would like to discuss how Saltbox Bookkeeping can support you with any aspect of bookkeeping, please feel free to contact us.