Payments on account are due if, for the previous year, there was tax underpaid of over £1,000 (£500 for years prior to 2009/10) or if the non Pay As You Earn tax due is 20 per cent or more than the total tax due for that year.
Payments on account consist of two payments, one by 31 January in the current tax year and one by 31 July in the following tax year. Each payment is half of the tax due for the previous year.
If you consider that the tax liability for the current year will be lower than the previous year, a claim may be made to reduce payments on account.
However, if the actual tax due is more than the claim amount, interest will be due from the relevant dates and calculated at the official rate.
For an incorrect statement on the claim, made fraudulently or negligently, the maximum penalty is the amount, or additional amount, that they would have paid on account if they had made a correct statement.
HMRC's Form SA303 may be used as a claim to reduce payments on account or to change earlier claims; this can be accessed via the 'Related links' section on this page.
| Total income tax liability | 9,220 |
| PAYE deducted relating to 2008/09 | (3,010) |
| Tax credits on dividends received | (300) |
| Tax deducted on interest received | (250) |
| Class 4 NIC | 200 |
| 'Relevant amounts' for calculating payments on account | 5,860 |
| Capital gains tax liability | 2,000 |
The payments on account for 2009/10 will be based on 'relevant amounts' which in the above example would be £5,860.
Half of the relevant amounts (£2,930) would be due by 31 January 2010 and half (£2,930) by 31 July 2010.
No payment on account is required relating to capital gains tax liability, therefore although the CGT liability of £2,000 will be due by 31 January 2010 this will not affect the calculation of the payments on account for 2009/10.
Details as in Example 1 and Mr A claims to reduce payments on account to £2,000 in January 2010 and £2,000 in July 2010.
The 'relevant amounts' of Mr A for 2009/10 is actually £4,600.
Therefore, he underpaid tax by £300 in January 2010 and £300 in July 2010, and interest will be due from these dates.
The £30,000 charge for claiming the remittance basis will also be included in calculating the 'relevant amounts'.
For 2008/09, Mr B's self-assessment resulted in payments on account of £100,000 due by 31 January 2010 and £100,000 due by 31 July 2010. He did not claim the remittance basis for 2008/09.
A claim is made to reduce payments on account to two payments of £90,000 each due to a drop in income.
The actual tax liability for 2009/10 is £180,000 but Mr B also claims the remittance basis and has to pay the remittance basis charge of £30,000, so the total liability is £210,000.
The payments on account should not have been reduced, so interest will be charged from 31 January 2010 on £10,000 and from 31 July 2009 on £10,000 up to the date that payment is made.
If the remittance basis charge of £30,000 was paid in the previous year (2008/09) on nominated capital gains, the £30,000 charge cannot feature in the payments on account calculation for the following year as no payment on account is required relating to capital gains tax liability.
If the remittance basis charge of £30,000 was paid in the previous year (2008/09) on income, the £30,000 charge feeds through to the payments on account calculation for the following year, unless the individual makes a claim to reduce the payments on account on the grounds they will not claim remittance basis next year.
If he then claims the remittance basis and pays the £30,000 charge in next year, then interest will be charged on the reduction in the payments on account.