Hundreds of thousands of self-employed workers and individuals with additional income across the UK are bracing for what experts are calling a "brutal" financial shock. Within days, HM Revenue and Customs (HMRC) will dispatch demands for substantial tax payments, with a critical deadline of January 31.
What are 'Payments on Account' and why are they due?
The core of the issue lies in the system of 'payments on account'. These are advance payments towards your next tax bill, calculated based on your previous year's tax liability. As Robert Salter, Director of Global Mobility at Blick Rothenberg, explains, they are "advance tax payments which one needs to make for future tax years."
For the self-employed and others required to complete a Self Assessment, this means the bill arriving this month isn't just for the previous tax year. It also includes a 50% advance payment for the current year. Combined with any remaining balance from last year, this can create a demand worth up to 150% of a single year's tax bill.
Key dates and rules for taxpayers
The system mandates two instalments each year. The first is due by midnight on 31 January, and the second by 31 July. Each payment is typically half of the tax you owed in the previous year.
There are exceptions. You are not required to make payments on account if your previous year's tax bill was under £1,000, or if you have already paid more than 80% of the tax owed through other means, such as your PAYE tax code.
It is crucial to check your Self Assessment statement or online account to confirm the exact amount you owe. Failure to pay by the deadline can result in interest charges and penalties from HMRC.
The risk of a 'balancing payment'
An additional complexity is the potential for a 'balancing payment'. This occurs if your earnings in the current year turn out to be higher than the estimate used to calculate your payments on account. If you earn more, you will still have further tax to pay on top of the advance instalments, which could come as another unwelcome surprise.
With the festive season now over, the reality of this significant financial commitment is setting in for many. Experts urge all those within the Self Assessment system to review their liabilities immediately and ensure they are prepared to meet the fast-approaching deadline.
