HMRC - Payment on account - Required or Optional

[Clariman]

We have income from employers' pensions (one private sector, other public), but do tax returns because we have income from holiday lets too. I use Taxcalc to prepare our tax returns. Most years we had tax due to pay and I was happy to pay in a one-off. It would give me the option to take it out of next year's tax code etc. However, in recent years it seems to be insisting that we pay a large chunk on account.

Is that Taxcalc just giving it to me as a recommendation?
Does HMRC insist on paying in advance on account?
Is it optional? If so, how do I get out of it?

Thanks
Clariman

[mc2fool]

It's certainly not optional! If, however, you expect the next year's tax bill to be lower than this year's you can ask to reduce the payment on account. See https://www.gov.uk/understand-self-assessment-bill/payments-on-account

[dealtn]

Is it optional? If so, how do I get out of it?

Thanks
Clariman

In your (online) tax return, towards the end, it will calculate what it thinks is the correct amount for you to pay on account for the upcoming year. You can change this amount, in either direction, and down to zero if you choose. You are prompted for a reason. This may be accepted. However, should in the later year it be the case you should have paid more tax, and reduced the "on account" suggestion, be prepared to pay interest on that difference.

[scrumpyjack]

But note that if you ask for a reduced payment on account and then subsequently it transpires you should have paid more, they will charge interest on the underpayment. I prefer to overpay somewhat in such circumstances and then get a tax free repayment supplement because I have paid too much tax.

[Lootman]

It's certainly not optional! If, however, you expect the next year's tax bill to be lower than this year's you can ask to reduce the payment on account. See https://www.gov.uk/understand-self-assessment-bill/payments-on-account

It may not officially be optional but I have never been asked to pay on account in over 15 years of submitting SA tax returns. I do what Clariman does and submit a cheque once a year with my return.

The tax due is variable but usually a few thousand. I use an accountant and so assume that this pattern is allowed. The other thing to add is that I am very prompt about submitting and paying - always done by the end of May each year, which may make a difference.

[scrumpyjack]

There is a defined system for calculating payments on account. I always have to make large payments on account because I have a large dividend income where PAYE or deduction at source does not apply. Also one off types of tax payments (eg a large CGT bill) do not result in payments on account for the next year.

[mc2fool]

It's certainly not optional! If, however, you expect the next year's tax bill to be lower than this year's you can ask to reduce the payment on account. See https://www.gov.uk/understand-self-assessment-bill/payments-on-account

It may not officially be optional but I have never been asked to pay on account in over 15 years of submitting SA tax returns. I do what Clariman does and submit a cheque once a year with my return.

The tax due is variable but usually a few thousand. I use an accountant and so assume that this pattern is allowed. The other thing to add is that I am very prompt about submitting and paying - always done by the end of May each year, which may make a difference.

Unless you fall under the exclusions listed at the link above, I suspect you're wrong about that and your accountant includes the payments on account within the amount he tells you to write the cheque out for.

If you do it in May for the recently ended previous tax year then your single payment will include the 2nd payment on account for the previous year (which actually isn't due until the end of July) plus the balancing payment for the previous year and the 1st payment on account for the current year (both of which aren't due until the end of the following January). I'm sure HMRC are grateful for you paying them well ahead of when you have to.

There is a defined system for calculating payments on account. I always have to make large payments on account because I have a large dividend income where PAYE or deduction at source does not apply.

Yes, but as long as you have a more-or-less regular such income year to year those payment will be more or less the same each year, so it just ends up being a rolling amount. The payment on account system is kind of a substitute for PAYE, which is, of course, itself a payment on account system as your tax bill isn't final until well after the end of the tax year but under PAYE you've been paying it all along.

Indeed, the payment on account system is actually more a payment-in-arrears system than PAYE is 'cos, I for example (not being so keen to give the taxman their slice early), have just paid my first payment on account for 2022/23 (1/2 the estimated tax bill for the year) whereas those on PAYE have already paid 9/12ths of it, and I don't have to pay the other 1/2 until the end of July, where of course those on PAYE will have paid all of it during the tax year.....

[mike]

[...] It may not officially be optional but I have never been asked to pay on account in over 15 years of submitting SA tax returns. [...]

The tax due is variable but usually a few thousand.

Strange.

I was under the impression that if you had to pay £1,000 or more as tax on income not taxed at source (eg dividends, interest) then this amount was divided in two and submitted as payment on account for next year's tax bill in January with the previous year's tax, and in the July of the current year. So the first time you fall into this category, you have 50% extra to find in the January, but it works its way through the system for later payments.

Tax on capital gains is excluded from the payment on account sysytem.

Edit to add I see mc2 has given a fuller explanation, but I'll let this stand

[scrumpyjack]

I find it can be hugely variable as dividend income can vary a lot. eg when Covid hit lots of companies stopped paying dividends so there was a big drop, then the miners and builders started spewing out humungous divis. Then dear old Tesco decided to hand back £5 billion to shareholders as a dividend because they sold their far east company. Crazy to pay that as a divi. In my old fashioned outlook a dividend is something paid out of after tax earnings, not a distribution of the proceeds of a capital disposal.

Nevertheless I just pay what their system determines and it all comes out in the wash eventually

[Lootman]

[...] It may not officially be optional but I have never been asked to pay on account in over 15 years of submitting SA tax returns. [...]

The tax due is variable but usually a few thousand.

Strange. I was under the impression that if you had to pay £1,000 or more as tax on income not taxed at source (eg dividends, interest) then this amount was divided in two and submitted as payment on account for next year's tax bill in January with the previous year's tax, and in the July of the current year. So the first time you fall into this category, you have 50% extra to find in the January, but it works its way through the system for later payments.

Tax on capital gains is excluded from the payment on account system.

As mc2fool says, it is possible my accountant does this for me, although it is odd that he would not tell me that. I do not have an online account so I see none of this.

Again as mc2fool notes, I am paying well before I have to. But it is worth it to me just to get it out of the way early.

Definitely more than £1,000! My tax due is mostly CGT and tax on dividends, so perhaps I am allowed the exception for that.

[bluedonkey]

The option to have the 2021/22 self assessment tax collected via PAYE in 2023/24 is not available if the return is filled after 30 December 2022.

[Gersemi]

Again as mc2fool notes, I am paying well before I have to. But it is worth it to me just to get it out of the way early.

Definitely more than £1,000! My tax due is mostly CGT and tax on dividends, so perhaps I am allowed the exception for that.

Yes, you don't have to make payments on account for CGT as it is a one off event (even if you regularly make sales, you can only sell each asset once). The tax due on dividends is subject to payments on account, but perhaps that part is less than £1000.

[GeoffF100]

I have had payments on account for many years. No problem. HMRC sends me a bill by post and I pay it by card online. I believe you can also pay by direct debit, but that looked more complicated when I last looked several years ago.

[absolutezero]

But note that if you ask for a reduced payment on account and then subsequently it transpires you should have paid more, they will charge interest on the underpayment. I prefer to overpay somewhat in such circumstances and then get a tax free repayment supplement because I have paid too much tax.

Worth highlighting this!

[absolutezero]

Strange.

I was under the impression that if you had to pay £1,000 or more as tax on income not taxed at source (eg dividends, interest) then this amount was divided in two and submitted as payment on account for next year's tax bill in January with the previous year's tax, and in the July of the current year.

I've gone over £1000 non PAYE and never been asked for payment on account.
This year, for the first time, I have and they want the tax upfront.
I was under the impression if it was 50%+ of the TAX payable coming from non-PAYE sources that triggered payment on account..
Confusing.

[bluedonkey]

Strange.

I was under the impression that if you had to pay £1,000 or more as tax on income not taxed at source (eg dividends, interest) then this amount was divided in two and submitted as payment on account for next year's tax bill in January with the previous year's tax, and in the July of the current year.

I've gone over £1000 non PAYE and never been asked for payment on account.
This year, for the first time, I have and they want the tax upfront.
I was under the impression if it was 50%+ of the TAX payable coming from non-PAYE sources that triggered payment on account..
Confusing.

Not quite. The self assessment tax has to be more than 20 per cent of the total income tax (and class 2/4 NI) before the POA is triggered.

[Lootman]

Again as mc2fool notes, I am paying well before I have to. But it is worth it to me just to get it out of the way early.

Definitely more than £1,000! My tax due is mostly CGT and tax on dividends, so perhaps I am allowed the exception for that.

Yes, you don't have to make payments on account for CGT as it is a one off event (even if you regularly make sales, you can only sell each asset once). The tax due on dividends is subject to payments on account, but perhaps that part is less than £1000.

Dividends were about £5,000 last year. Capital gains in the region of £30,000. So the rules say that I should be paying on account but I have not been asked/told to.

So if it is a rule then it appears to not always be enforced in at least some cases.

I've gone over £1000 non PAYE and never been asked for payment on account. This year, for the first time, I have and they want the tax upfront.

I was under the impression if it was 50%+ of the TAX payable coming from non-PAYE sources that triggered payment on account..
Confusing.

100% of my income is from non-PAYE sources. Zero withholding. I have not had a PAYE code this century!

[scrumpyjack]

Capital gains are ignored for payment on account purposes.

[mike]

Again as mc2fool notes, I am paying well before I have to. But it is worth it to me just to get it out of the way early.

Definitely more than £1,000! My tax due is mostly CGT and tax on dividends, so perhaps I am allowed the exception for that.

Yes, you don't have to make payments on account for CGT as it is a one off event (even if you regularly make sales, you can only sell each asset once). The tax due on dividends is subject to payments on account, but perhaps that part is less than £1000.

Dividends were about £5,000 last year. Capital gains in the region of £30,000. So the rules say that I should be paying on account but I have not been asked/told to.

So if it is a rule then it appears to not always be enforced in at least some cases.

I've gone over £1000 non PAYE and never been asked for payment on account. This year, for the first time, I have and they want the tax upfront.

I was under the impression if it was 50%+ of the TAX payable coming from non-PAYE sources that triggered payment on account..
Confusing.

100% of my income is from non-PAYE sources. Zero withholding. I have not had a PAYE code this century!

Do you mean this as written ? Or do you mean tax payable on dividends received was £5,000 ?

If dividends were £5,000 then tax was around £260 so would not trigger PoA.

[Lootman]

Do you mean this as written ? Or do you mean tax payable on dividends received was £5,000 ?

If dividends were £5,000 then tax was around £260 so would not trigger PoA.

£5,000 is the dividend amount received. So that can explain why no payment on account. There is some interest as well but not a lot. And my state pension.