A lot of self-employed people will now be filing their tax return. If you’re thinking about putting it off see this post about why not to. A very common question which crops up is ‘What are payments on account?’

This has caused a lot of confusion over the years, so hopefully this post will help to clear up some of that confusion.

Self assesment tax liabilities are based on the tax year which runs from 6th April – 5th Apri, with the tax due to following year by the 31st January. For example, tax due for the tax year 6th April 2010-5th April 2011 is due by 31st January 2012. Generally if you tax liability is greater than £1,000 you will be asked to make payments on account (POA) towards the tax for the next year (2011/12 in this example).

The POA is based on the previous year’s liability with 50% being due by the 31st January and the remainding 50% at the of July. When you come to file your self assesment tax return for 2011/12 any tax due over the POA’s already made will be a balancing payment, due by the 31st January 2013 with another 50% POA

Worked Example:

2011 Liability:                £2,000

2012 1st POA:                £1,000

Due by 31st Jan 2012:  £3,000

2012 2nd POA:              £1,000

If the tax liability for 2011/12 is still £2,000 there will be nothing additional to pay by the 31st January 2013 other than the £1,000 POA (50% of £2,000). If the tax liability were to increase to £2,500 for 2011/12 a balancing payment of £500 would need to be made along with a revised POA of £1,250 (£1,750 in total) by the 31st January 2013.

However, if your business profits are reducing, or you believe that your tax liability will be less for the next tax year, you can apply to HMRC to reduce your payments on account. It is adviseable to be very careful about taking this action: if your profits do not reduce by as much as anticipated HMRC will charge you interest on any underpayments.