Act now to make the correct payments on account by 31 July

What are payments on account and how are they calculated?

Many self-assessment taxpayers will already be familiar with the phrase ‘payments on account’ (POAs). They exist to spread the tax burden over the space of a year by requiring qualifying taxpayers to make advance payments towards their tax bill. 

If the balancing tax payment for the year is either; more than £1,000, or less than 80% of the tax collected at source (this is generally via PAYE), Self-Assessment taxpayers are required to make two equal payments towards their tax liability, payable on 31 January and 31 July following the tax year in question. By design, the payments on account regime enables The Exchequer to collect the tax due at a much earlier point from individuals who are in receipt of investment income, as the tax is generally not withheld at source. 

Each POA is calculated at 50% of the previous year’s tax liability. Should the total tax due in the current tax year exceed the two POAs combined, the additional amount, known as the ‘balancing payment’, is payable by the normal Self-Assessment filing deadline. This is 31 January 2022 for the 2020/21 tax year. 

It is worth noting that while capital gains disposals are also reported on the Self-Assessment tax return, the current POA regime is a mechanism to collect tax on income and not capital gains. Therefore, a capital gains tax liability does not influence the POA due on 31 January and 31 July. However, with recent additions to the legislation, such as the Residential CGT regime, which ensures that any CGT arising must be paid on account to HMRC within 30 days of completion, it is possible that a POA regime for disposals of other types of assets could be announced in a future Budget.