It's that time of year when company directors and self-employed business owners are completing their tax returns. Many will have to make Payments on Account (POAs) by 31st January as part of their final tax bill. I meet a lot of people who regularly make POAs but aren’t really sure what they are and why they have to pay them. So here’s an overview on what POAs are, how they are calculated, and when you might have to pay them.
What are POAs?
POAs at literally payments on account against your next income tax bill. If you’re employed then tax is deducted from your pay each time you’re paid. However many other types of income, such as dividend income, self-employment or rental income are taxed once a year when you complete your end of year tax return. HMRC requires most people in this situation to make upfront payments (POAs) before they complete their tax return.
Does everyone who prepares a self-assessment tax return need to make POAs?
No, there is a lower limit. If your last self-assessment tax bill was below £1,000, or if you’ve already paid more than 80% of the tax you owe, then you won’t need to make POAs.
How are POAs calculated?
POAs are based on your most recent tax bill. POAs are due on 31st January and 31st July each year, with each POA being half of your last tax bill amount (income tax plus class 4 national insurance). When you complete your tax return you may need to pay more tax (if you owe more than you’ve paid in POAs) or be entitled to a refund (if you’ve paid more in POAs than you owe in tax).
Here’s a couple of examples:
Richard is employed and also has income from a rental property. His tax bill for 2017-18 was £850, after taking into amounts already deducted from his salary. Because this is below £1,000 he doesn’t need to make POAs for 2018-19. Instead, any extra tax he owes for 2018-19 will be due for payment by 31st January 2020.
Katie is a self-employed marketing consultant. Her tax bill for 2017-18 was £5,000. HMRC calculates her POAs for 2018-19 as:
- £2,500 due by 31st January 2019
- £2,500 due by 31st July 2019
In August 2019 she does her tax return for 2018-19 and her final tax bill for that year is £6,000. She’s already paid £5,000 in POAs, so she owes £1,000 as a final payment.
What if I’ve paid more on account than I owe on my final tax bill?
If you’ve paid more in POAs than your final tax bill you will get a refund from HMRC. This would be paid back to you once you submit your final tax return for that year. An incentive to get your tax return in early!
I had an unusually high income last year but am expecting lower income this year - can I reduce the amount I have to pay on account?
Yes you can apply to reduce your POAs. However you should be aware that HMRC may charge you interest if you owe additional tax at the end of the year having reduced your POAs.
I’ve been self-employed for a few years but this is the first year I’ve had to pay POAs - why?
If your taxable income is below £1,000 then you won’t need to make POAs. However once you go over the threshold you will need to make POAs from 31st January in the new tax year.
It feels like I’m paying tax on profits I haven’t earned yet
Because you’re paying tax before you’ve done your tax return it can feel like you’re paying the tax before you’ve earned the income. However, the first POA is actually 9 months into the tax year, and represents only 50% of your estimated annual tax bill, with the second POA 3 months after the end of the tax year.
I would like to find out more, how can I discuss this with a real person? Please call me for a chat