What is a second payment on account and how is it calculated?

For the uninitiated, you may be wondering what a ‘second payment on account’ is. If you’re a freelancer or have any earnings outside of PAYE, you may need to make two advance payments on account towards your current year’s tax bill.

As most of you will be aware, the date of the first payment on account is 31^st January – which is also the deadline for your Self Assessment. However, without the buzz of tax conversation, the summer deadline is considerably less observed and can catch out even the most diligent of taxpayers.

Not everyone will need to make payments on account, but with the 31^st July deadline fast approaching, it’s best to be certain well before the due date. To clarify, Mike Parkes from GoSimpleTax has provided an overview of your responsibilities.

What is a second payment on account?

For those who are required to make payments on account, your estimated tax liability for the year ahead is split into two in order to make the payment easier to manage. For example, if your tax bill for 2017/18 was £5,000, then HMRC will require two payments on account of £2,500 each to go towards the 2018/19 tax year. The first will be due on the 31^st January 2019, and the second on the 31^st July 2019.

You will only be required to make payments on account if your Self Assessment bill was above £1,000. Although, if over 80% of your annual tax bill is deducted at source (from employment for example), you are also exempt from making payments on account. For instance, you may have a total tax bill of £10,000 for 2017/18, £8,200 of which is paid via your salary – so you just need to make one payment of £1,800 in January, and not any payments on account (as 82% of your tax is paid at source, through your salary). 

How is it calculated?

It’s important to remember that payments on account are based on your earnings from the previous year. This means that should your income dramatically fall, your payments on account may be reduced to reflect a lower income. You can, therefore, make a claim to reduce your payments on account. Be careful though: reduce them too much and you can incur an interest charge on any tax shortfall.

While the opposite applies if your income increases (as this will result in a ‘balancing payment’ on 31^st January of any shortfall from your two payments on account), it’s important to be aware of these hidden costs and be alert to the consequences of any significant changes to your earnings.

If you’re struggling to find the relevant information to make your second payment on account, check any HMRC correspondence you’ve received. They should have written to you following your January payment, including further details on how to pay in the summer.

What if I can’t afford it?

Contact HMRC well before the 31^st July if you’re concerned you can’t make payment. They may be able to arrange a payment plan. Should you miss the deadline without informing them, you’ll start to accrue interest and penalties.

HMRC are particularly stern with on account payments. If you haven’t paid off the tax by the following January, you can be expected to pay 5% of the total charge along with the accrued interest. Ultimately, be sure to stay aware of your responsibility throughout the year to avoid any hidden costs and being charged further.

About GoSimpleTax

It’s not easy to stay well informed of legislative changes and your tax responsibility. That’s why software like GoSimpleTax offers tools to help keep you compliant. With this platform, you can keep track of tax bill payments and ensure that funds are available for both payments.