Tax Return Question

[Conkerqueen]

It’s my first year doing a tax return that meets the threshold for actually paying tax, I have a quick question that hopefully I can get an answer for here before trying HMRC

So I have completed my return (not submitted) it says:

total amount due for 2021-2022 - £3,200.68
(fine, no confusion there)

Then it says-

plus
First payment on account for 2022-2023 £1,600.34

What is this payment for? Is it due with the 2021-2022 payment? Or will it be due January 2024? But again why?

My earnings for 2021-2022 were £14,000 so I was expecting a tax bill of around £2,800, so the 3,200 isn’t far off what I had expected, I’m just confused about this additional £1,600

It’s an upfront payment on the tax you will/may owe next year. It puts you into a tax credit, basically.

It’s due with the 2021-22 payment.

Those payments are on account for next years tax so if you earn similar in the current tax year your tax bill will be nearly paid and you will just need to pay the payments on account when next year comes rather than the lump sum and the payments on account.
It is automatic if your tax bill is over £1,000. You can reduce the payments on account if your earnings are not going to be as high.
Do you not have a standard personal allowance of £12,570 or are your earnings more than £14,000 as usually your income is totalled up then the personal allowance is deducted before calculating your tax bill.

They’ll want another £1600 off you in July.

www.gov.uk/understand-self-assessment-bill/payments-on-account

Yes it's right. It's on account for next year. Really unfair. Under 500 owed you don't have to pay on account.

@SLT2022 I’m also employed PAYE so that takes up my personal allowance

@OnceAgainWithFeeling another! As in 1,600 now and another in July?

Yes. It’s all covered in the link.

@OnceAgainWithFeeling thank you for your help!

You’re paying in advance for next year basically. It gets split into 2 payments in January and July, and assumed it will be the same amount as this year.

If you think that you will make less profit in this current tax year then you can apply to have them reduced or not pay them.

The £1,600 payment is a payment on account for the next year, which is based on the previous year's taxable amount. And yes, they normally do want another amount in July.

The payment on account can be annoying if you have a year when you make a lot for whatever reason, then they use that amount to calculate the payment on account for the next year and you have to pay them £££ which they then end up repaying you!

HMRC will send you a self-assessment statement explaining it all.

They're very helpful if you get in touch with them directly - if you can't afford the unexpected bit, they'll help you to make a plan to spread the payments out or whatever; they might also reduce it down for you (although you'll then have to pay for it next year).

As everyone else has said this is an advance payment towards next year. It’s always a shock the first time you earn enough to pay on account, but it does make things more manageable in the long run if your income stays stable.

One thing- when you come to pay your tax bill next January, make sure you remember that you’ve already paid £3200 towards that bill(if they take the same amount from you in July). For some reason when you do your tax calculation it doesn’t take into account your advance payments, or at least it never does when I do it, not sure if I’m doing something wrong! So you’ll get what looks like a shockingly large bill again but you’ve actually already paid a large chunk/all of it.

Also bear in mind that this time next year you'll have to pay a similar amount for the year after that.

Thanks for all your replies! I think I’m clear on it all now.

so if they take next years £1,600 now and another £1,600 in July, if I earn the exact same this year, come January I’ll owe nothing except Januarys advance payment?

Always a shock the first year you have to pay on account for the coming year as well as in arrears for the year just gone. But as others have said, if you expect your SE income to remain fairly stable it's a better system going forwards (as long as you can afford the big bill now!). In the future you'll pay half the current year's bill in Jan, half in July, and just a small adjustment at the end of the year when you also pay NEXT year's first payment on account in Jan.

Yes that's correct.

@Bramshott ah great! Glad I’ve grasped it. Yes it’s definitely a big shock but can see how it works out to be easier in the long term. And I suppose they do it this way so they’re not owed!

so if I paid the 1,600 now and 1,600 in July, if I had made no money come the next tax return, I’d get it back?

If you do next years return online after April but before July, the exact total will re-adjust itself to the correct amount owed. (you usually have until the end of January to pay the final balance) - but I find it more useful to know exact amounts before then.

Yes, that's right. There is the facility for a 'balancing payment' to pay the rest of the tax if you earn more from SE than you do in the year 2021/2.

I think you can opt for them to take it by PAYE by adjusting your tax code, but that might complicate things, so you might want to keep things separate. Or if you earn less during 2022/23, you'll get a refund as the two payments made will have been too high.

Once you get into the swing of things, it isn't really paying in advance, it's paying as you go along. For the current tax year for money earned between April 2022 and April 2023, the first payment on account is due by the end of January 2023, so near to the end of the period when you earned the money, then the second in July 2023, so after the end of the tax year, and the final balancing payment not due until 9 months after the end of the tax year, whereas with PAYE, you'll have paid all your tax by the end of the tax year where you earned the money.

For the year 2022/23, you'll know by now approximately how much you'll earn in this tax year, so if you've earned a lot less, you can ask to reduce/suspend the payment on account, so you don't have to pay a lot of money that you can't get back until you do your tax return in a year's time.

You have to submit the return by 31st Oct to have it applied to PAYE tax code.

Payments on account are triggered when less than 80% of your overall liability has been deducted at source. So, the payments will be due as follows

Jan 2023 - balancing payment due for the 2021/2022 tax year (ie for your tax return you’re doing now)

Jan 2023 - first payment on account of the 2022/23 tax liability (ie the current tax year we are in now)

Jul 2023 - second payment on account of the 2022/23 tax liability. It will be equal to the January payment on account.

Jan 2024 - Balancing payment due for the 2022/23 tax year. The payments on account you will have already made will be deducted from the payment due. So, assuming you have exactly the same income in 2022/23 as you did in 2021/22, you will have no balancing payment due as the payments on account should cover it. In Jan 2024, you’ll have the first payment on account due in respect of 2023/24.

You can apply to reduce the payments on account, if you think the liability for the year will be lower, but be careful not to reduce them too far because you’ll be charged interest.

When people are saying that the payments on account are in respect of “next year”, that’s not strictly correct. The Jan 2023 payment is in respect of the 2022/23 tax year (ie the one we are currently in). It’s against the liability that would be due next January.

Yes, the payments will go as a credit on your statement of account to set against the 2023/23 liability. If there’s no liability, you can ask for a repayment.

Exactly this!

It’s not unfair really. The payment on account due Jan 2023, is in respect of the 2022/23 tax year (ie the one that ends in 3 months time). For those on PAYE, they’ve been paying the liability for that tax year through their monthly salary since the very beginning of the tax year.