"Money on account" HMRC question

[summerlovingvibes]

Please can someone very simply explain this to me.

DH and I do a self assessment tax return each year.

I don't have to put anything on account as don't have a big enough bill. Used to but my income has dropped as now only work PT.

DH puts thousands on account every year. Towards the next tax year. But where does this money go?? I just don't understand it!

Last year he paid his 4k tax bill and then had to put another 4k on account for this year. This year his tax bill is 4k and it asks for that amount... plus more for on account for next year.

So where is the money on account from last year? Why don't they just automatically do a calculation to take in account what you have already paid?

It's such a ridiculous system!

It just rolls on every year but I'd like to know where all the supposed "money on account" goes!

Just to be clear, my DH has an employed job which he pays PAYE with. This is always correct.

Separate to that we have a couple of rental properties who ch is why we do self assessment.

So he earns approx 10-11k from the rent, and ends up paying about 8k each year. 4k for the tax year he does the self assessment for (and which the self assessment calculates he owes) and 4k for "on account" for the next year.

We aren't deducting anything from anywhere - are we supposed to personally look back at what he paid last year on account and look at the self assessment total amount this year and deduct it ourselves?!

If so, why oh why is there no where that does this calculation for you?!

If you go on the salary calculator website and put in his income for that year itl show you what the calculation is for tax and national insurance. It will likely work out that if you deduct his payment from last year itl leave the amount that when you add to the next payment on account is the total paid this year. It does show you the calculation at the end. It says total, minus payment on account, balance, payment on account for next year, total to pay. Wording to that effect, I can't remember exactly from last week. The breakdown was there though.

You can see all of this online if you log into your hmrc account by the way, the tax shouldn't be exceeding 40%

There is literally a full breakdown on the hmrc website. If you overpay they pay it back to you.

when your tax return it generates a figure. It will then update a few days later once it’s all been checked.

the phrase “on account” is confusing and misleading. You pay tax when you earn money. Most do this once a month. If you have other income you can if you do wish postpone paying that tax until 31st jan the following year. That means that you have been “in debt” since April.

when you pay “on account” they have made an educated guess about the tax you should owe in April May June July August September October November December and January and have asked you to pay half of this up front. So you’re still quids in since the money sits in your account for longer.

That will depend on income. If you have a higher income you can.

The large (font and amount)figure that comes up on the screen immediately after you submit your tax return is your tax bill for the year.

In little font underneath it says it doesn't include payments on account and the amount of tax due will be available within 48-72 hours.

So if you log back in later it will tell you how much tax you need to pay, which should be lower because you can deduct the payments on account you made 6 and 12 months ago, so what you're actually paying is a small balancing payment and the payment on account towards the current tax year.

I suggest your DH looks through the last couple of years tax return calculations and the explanation linked above and if he/you still don't understand, pay a reasonably trivial sum to accountant to explain it to you and even do his tax return.

But if you're paying the first number you're overpaying. However then HMRC might refund this by adjusting his tax code or they might do nothing and the monmight just be sitting there.

Is the £10-11k rental amount profit or rental income?
Point of asking is that you only get a 20% credit for related interest costs.

You should be entering the payments on account into the tax return information, but there might be some adjustment going on thought his PAYE code - you also need to enter some PAYE code details on the return.

The information shown on the HMRC account online has ALL the details.
It shows tax due for the year, payments made etc.
The tax return full calculation also has all the details of how the tax is calculated.
If you don't understand it you to find someone who does who can sit down with you and go through the actual figures.
I'm not saying it is straightforward (I'm an accountant and understand it, but appreciate that not everyone does), but there are people who do understand and can explain it, even if you have to pay an accountant to do so.

Do it earlier! You can leave paying until January but do it earlier. It will give you the calculation immediately but if you log back in 72 hours later, it will update your account and give a figure of rhe remaining balance left to pay.

Also get the app, it's lovely and clear.

Remember you're still paying a full year's worth if tax each time. It's made up if your balancing payment (if your on account payments don't cover your full tax bill) plus the future on account payments for the following year. They aren't charging you twice.

But again, do it earlier and it will be clearer and less stressful.

It did take me a while to get my head around this because for years DP didn't need to make any payments on account because he had PAYE income and also was on the construction industry scheme, which takes too much tax and gives some back later so this offset the tax due on his small amount of genuinely SE work.

As his client base changed and now all his income is SE his payment on account has increased to about £4k twice a year. The first year was a hard shock though because the balancing payment was huge and he had his first PoA to make.

If you're checking the figure immediately after submitting the rax return then it won't have taken the 'payments on account' into account yet.

This tripped me up the first time - the calculation showed the whole amount of tax etc. - but there was a note somewhere on the page saying that payments on account wouldn't have been included.

I checked my accout a week or so later and the figures had been updated correctly to show what I actually owed.

Edit - I see others have explained this better! Should have rtft!

It sounds like it would be worth getting a session with an accountant.

One potential explanation is that he’s got a bit of tax owed on his main earnings despite being PAYE, which is then increasing the tax bill on self assessment.

That’s pretty common if you’re a higher rate tax payer as you start to lose allowances for other things, pay tax on interest, bonuses don’t get taxed right through PAYE etc.

I was very confused the first time I had to pay on account but I get it now. I'll use rough figures to explain.

Jan 23 was the first time I had a tax return after my first payment on account (made July 22)

When I did my tax return I was horrified as I didn't have enough savings to cover it. However I waited a couple of days and then discovered that the amount I was due by Jan 23 was reduced by the amount I'd paid in Jul 22.

Same thing happened this year. I was told my tax bill was £1,800 but actually it was only £360 because I'd paid £640 in July 24 and the other £800 is due by July 25.

I've hardly done any freelance work this year so I expect my tax bill in Jan 26 will be tiny and I'll have paid most of it in Jul 25.

Does this help?

@Bjorkdidit thank you.
We wondered about his tax code being changed but have looked at this and it appears to be right for what he earns through his PAYE job, so I don't think any adjustments have been made.

Sounds like we need to check back a few days after doing the self assessment to see what is actually due, and not just pay the figure we see in bold on the self assessment.

Will do this at the weekend and update - we are away without laptop at the moment so can't check until the weekend.

Thanks all.

On account is a prepayment.
HMRC assume you will earn the same amount next year.
So if you always earn the same amount, your tax will be the same each year (all things being equal)
Yr 1: £4k tax bill + £2k prepayment for next year
Yr 2: £2k left to pay + £2k prepayment for next year
Yr3: £2k left to pay +£2k prepayment for next year
etc
Last year of self employment: £2k left to pay + £2k prepayment for next year.
Year after self employment: get the £2k back
(Or you may not need to pay the prepayment in the last year of self employment depending on timings)

So, you are always paying £4k each year - except year 1 and the year after self employment.

I also have a PAYE job (although this doesn't earn enough to pay tax, it means that I use up most of my tax allowance on it so all my self employment is taxed). If the amount we pay when we first do our tax return isn't the amount we owe (because payment on account hasn't been shown...WHY?) then how come if you do as OP and I do and pay the full amount in January (I have ADHD and put stuff off until the last minute and then basically shove money at it to make it go away), why do we not then get money back? Because we will have overpaid?

@summerlovingvibes I'm seeing my son on Saturday. I'm going to ask him to explain slowly, carefully, with use of illustrative pebbles, until I get it and then I will report back! Because after all the lovely posters trying to help, like you, I am STILL confused! (I was before, to be honest, but I have just been giving HMRC money to stop them from fining me, reasoning that I'd rather overpay than underpay, but.... where is it all going?)

They are very slow to update - I made a mistake when I submitted this January, I waited my 72 hours, went back and corrected, but the figure is still showing as I owe what they first calculated I owe. I've paid what I THINK I owe with the updated figures, but I have no idea whether they've processed this yet, or what that amount took into consideration. I regularly go back to my gateway site to check I don't owe anything though, because last year they downgraded my second payment on account presumably because I'd already covered it by throwing money at them! But there was no explanation as to WHY the figure had been lowered. I am not at all mathmatically capable but, as an author, my accounts aren't straightforward (there are lots of deductibles and money in isn't just payment from my agent) so sitting and going through it all with an accountant (my son has offered) would take longer than it takes to sort and input the figures myself. I know what I'm doing with my return (I've been doing it for ten years or more now), it's just the HMRC end that confuses me.

This! It’s really not that complicated. You’re just paying some of next years bill in advance to prevent people not putting tax money aside and then getting in debt. They also assume you’ll earn the same.

One years my husbands profits were a lot lower, so because of the payment on account, when it came to the usual bill, we’d already paid the whole lot & so didn’t owe anymore.

I don't think it's the forward payment element which is confusing the OP but rather the fact that in the initial calculation you get when you submit the return, it doesn't factor in the payment on account from last year. So it can seem like you are always paying too much - half the bill in Jan one year and then the whole bill again the next year (plus half the next year's bill).

@summerlovingvibes when you first get to the self assessment bit of your HMRC account -before you click on any returns or other info - there should be a balance amount showing how much you owe or are owed by HMRC.Below that is a link to explain the bill, and below that is a payments and credits link listing transactions for the last few years.

I do find all of these are not always well explained, but what I aim to do is submit the return early Jan, check back a week or so later and pay the amount showing on my balance, rather than the amount which was on the return calculation
Then as another poster said it's worth checking later in the year as well as your subsequent payments may be adjusted or you may even end up with a credit as they adjust it all

A session with an accountant could definitely help as they can log into your account with you and explain it, but I also find that HMRC helpline can be helpful if you call and ask to discuss payments.

@summerlovingvibes I have been so confused about it too. I actually got quite a clear answer from chat gpt if you'd like it explained simply. But the poster above who says about penultimate bill paying for the final bill makes sense.

This year its purpose was made so much clearer to me. I was earning more and more year on year, and suddenly for 24-25 I'll have earned significantly less (health reasons). I stated this and requested to reduce my payments on account, and so instead of a massive bill paying for next years tax the money I paid on account for last year (22-23) has been deducted from this year (23-24) and no payment on account this bill. So I suppose that's a very helpful point, that if suddenly your financial circumstances aren't good, your tax bill will already be partially paid for. I suppose losing out on interest is the only downside.

When you first submit your return it will show you a figure due but that doesn't take account of payments on account

You need to log back in a couple of days later to see what you actually need to pay

Have you been doing that?

Thanks @PartyOFive . I'm not confused by the idea of paying on account towards the next year, but actually never ever realised that when you do the self assessment return that you are meant to check back a few days later to see what you actually owe after they have taken into account what you already had on account!

Just basically assumed that the computer would do this calculation when you do the self assessment, I didn't realise it was a few days lag.

We tried contacting HMRC a few days before the deadline to work it out but after a few days of long waits we just paid the bill again (borrowed money to do so as can't afford it) and decided we will call HMRC after everyone has submitted in the hopes that we get through quicker.

Will try HMRC again and will also log on as soon as home to see if any adjustments have been made. And will keep fingers crossed he's entitled to some rebate as the bill was essentially 70% this year!

@DreamW3aver nope, haven't been doing that.

Stupidly thought that the self assessment figure was how much was owed and have been paying that figure. Never knew about having to log back in a few days later.

Will do this for sure!

If you look now then you should see a credit on your account

I'm generally a last minute person but I have got in the habit of submitting my tax return around May/June time. Then I know what my payments in January and July will be well in advance. It's helpful for planning and avoids this issue of the payments in advance not being credited immediately so you are not sure what to pay if you submit close to the January 31 deadline.

They do break it down for you. Every year you get a letter with your tax calculation in it showing the full breakdown. You can also download this on the HMRC website and through the app.

When you file your return, you can click to "view your calculation" which shows the payments due for the tax year and payment on account.

You can view your tax account statement online and in the HMRC app. This will show you any overpayment. Then if relevant you can request a refund or offset the overpayment against next year.

If this is too complicated, you can also pay an accountant to check everything for you.