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Are You Due A Payment On Account Refund From HRMC?

Payment On Account Refund

If you pay your taxes via self assessment, you may have been required to make payment on account. If that payment on account puts you in credit the following tax year, you may be due a refund.

You will know if you are due a refund because HMRC will notify you by your preferred method of communication. You will also be able to see the amount due online within your tax account.

If you’re self-employed, earning income from property or other means outside of regular employment, or are a company director you need to submit a self assessment form to HMRC annually. Part of this process means you may occasionally owe HMRC money if you have overpaid, or that HMRC owes you money if you have overpaid.

Read on for further insight into understanding if you’re due a payment on account refund from HMRC and how to get the refund.

What is Payment on Account?

Payment on account refers to HMRC’s system of getting self-employed people to submit payments online to cover their tax bills. The payments are requested in advance of the current tax year, twice a year in January and July. This is intended to spread the taxes owed for the year rather than having to pay them all at once.

The amount that you are asked to pay on account will be based on your previous year’s tax income, tax and national insurance (NICs) contributions. HMRC uses this as the basis to assume what your next year’s taxes will be.

For example:

If you owed £2000 tax for the tax year 2022/23 you could make two payments of £1000 The first in January and the 2nd in July. These payments would be made ‘on account’ and therefore in advance of your actual tax calculations for 2023/24.

If your actual tax calculations for 2023/24 turned out to be more than the £2000 you have paid on account, then you would owe HMRC the difference. If your tax calculations for 2023/24 turn out to be less than the £2000 already paid into your account, then you would have overpaid and would be due a payment on account refund from HMRC.

How Does Payment On Account Work?

If your tax bill for 2021-22 tax year was £20,000 – your payment on account for 2022-23 tax year would be made as follows:

  • First payment due Jan 31st 2023 would be £10,000 (50% of the previous year’s tax bill)
  • Second payment due July 31st 2023 would be £10,000 (50% of the previous year’s tax bill)

If your actual tax bill for 2023 turns out to be £25,000 you would need to make a balancing payment of £5000 by 31st January 2024 as well as your first payment on account for the 2023-24 tax year.

Who is Eligible to Pay Tax on Account?

Payment on account is required by HMRC when your previous year’s self assessment tax bill was more than £1000 and less than 80% of your tax was paid through your tax code or paid via PAYE.

This is because HMRC uses your previous tax record as an indication of what you’re likely to earn the following year. Tax bills of over £1000 will be easier to pay in instalments for most people, hence the introduction of the payment on account.

Employed people who are paid via their employers and the PAYE system do not need to make payment on account, as they pay their tax at the point they earn their income and not via the self assessment method. Similarly, anyone who owes less than £1000 via self assessment, will not need to make payment on account.

 

Why Would Your Tax Bill Turn Out to be More/Less?

Tax bills for the Self Employed can vary year to year due to a number of variables including higher expenses, less income being generated, or seasonal fluctuations being unreliable year-on-year.

Freelancers also vary the way they work – some will have regular clients providing a steady and even income throughout the year, whereas others may work on large one-off projects that attract ad-hoc payments in line with project completion.

All of these factors can cause a rise or fall in the amount of tax owed each year.

 

How to Claim Your Refund

If you have overpaid your taxes for the year, you will be owed a refund from HMRC. An overpayment could occur if you miscalculated the amount owed, or if your income has changed from the previous tax year.

To claim the refund due, you can claim through your HMRC online account.

In most cases, HMRC will have calculated the amount owed directly, so it’s a simple case of claiming it back by selecting your preferred payment method through your online account. You can expect to receive the money due within 12 weeks. If HMRC disputes the amount owed, you will need to go through an appeals process and provide evidence to support your case.

 

How to Calculate How Much Tax You Owe/Are Owed

To calculate how much tax you owe for any given tax year, follow the steps below:

  • Log and add up all income received in the tax year (employed earnings, self employment, investment returns, pensions).
  • Log and add up all of your allowable expenses. These are costs incurred as part of the course of running your business – it could be travel related, home office equipment, or mileage to visit clients for example.
  • You also need to know your tax liability and this depends on which tax bracket you fall into.

Tax brackets for 2023/24 are: 

BandTaxable incomeTax rate
Personal AllowanceUp to £12,5700%
Basic rate£12,571 to £50,27020%
Higher rate£50,271 to £125,14040%
Additional rateover £125,14045%

This means that if the sum of your earnings add up to £12,570 you have no tax to pay. If the total amount earned falls between £12,271 and £50,270, then you will be taxed at 20% for anything earned within this bracket. Any earnings over £50,271 but under £125,140 will be taxed at 40% and over £125, 140 earnings will be subject to 45% tax.

For example:

Steph earned £10,000 from part time employment and £5000 from self employed work in this tax year.

The £10,000 will have been taxed already at source through PAYE by her employer. That means she only has to pay tax on the £5000 self employed earnings.

As she has a personal allowance of £12,750, that leaves just £2,250 earned from the total £15000 income received to pay tax on. This would fall into the 20% tax bracket and mean £450 tax is due.

When filling out your self assessment online – HMRC’s system will calculate all of this for you based on the numbers that you input for your income and expenses.

How You Might Accidentally Overpay

If you don’t account for all of your allowable expenses, it is possible to overpay your tax figure. If you don’t log or record business expenses and allowances correctly, you will be unable to deduct them from your income.

The outcome of this is that you will be paying more tax than you need to. Another way that you could overpay tax would be if you didn’t properly declare all of the income earned in one year. This could happen if you have multiple streams of income, so it’s important to keep on track of your finances and stay organised.

What You Need to Do if You Underpay

If you overpay, you are due a refund, but if you underpay, then there is an amount that you will owe HMRC. If you find yourself in this situation, you will be charged interest on the amount owed until it’s settled.

If the amount owed is over £3000, then you could also be sent a penalty or further consequences as this is likely to be more than just a mistake.

The best thing to do if you have underpaid your taxes is to contact HMRC as soon as possible. They will be able to confirm the amount owed and arrange a payment plan to bring your outstanding balance to zero.

How to Make a Payment on Account

When you have the amount that you need to pay HMRC confirmed – either through your accountant, HMRC’s online portal, or your own self assessment return, you need to make the payment due.

Payments can be made to HMRC online, by phone or through the post but paying online is the easiest and most efficient for most people. You can make a bank transfer for the amount, or set up a direct debit for HMRC to collect the money on a set date. You need to make sure that you have enough money in your account on the selected date if choosing this option.

Paying by phone is easy too, just call the number shown on your account and follow the steps explained to make payment via your debit or credit card.

Cheques can also be sent to HMRC via the post. You will need to include your full name and address and the tax year for which the payment relates to.

How to Register with HMRC

If you’re self-employed, you need to register with HMRC within three months of starting your business. You can do this online, by phone, or through the post.

To register online, you’ll need to create an account on HMRC’s website. Once you’ve done this, you’ll be able to complete the self-employment registration form.

If you decide to register by phone, you can call HMRC’s Self-Employment Helpline and speak to a customer advisor.

Finally, if you want to register by post, you can download the self-employment registration form from HMRC’s website. You can then send it to their postal address for self-employment registrations.

What Other Taxes are Self-Employed People Eligible to Pay?

We’ve covered income tax here, but self-employed people are also required to pay National Insurance contributions too. These are paid as a percentage of your income.

Additionally, VAT may be payable if you’re earning over the threshold of £85,000 taxable income. You should also make allowances for capital gains tax, council tax, inheritance tax and stamp duty land tax which may be payable depending on your current situation.

These depend on your personal circumstances and how you earn your money. For example, if you sell property that you own, you’ll be liable for stamp duty land tax.

If you overpay on any of these, the process for getting a refund will be similar to the one outlined for payment on account refunds above.

Final Thoughts

Payment on account is a way of ensuring self-employed people and anyone else required to submit an annual tax return can easily pay their taxes in a manageable way. The amount owed is based on your previous tax year’s bill.

The most important thing to remember when managing your finances and taxes is to be honest and keep clear records of income and expenditure.

By keeping on top of your tax obligations, making timely payments and claiming any refunds that you are due, you can stay in the best financial situation possible.

If you find that you have overpaid your taxes and are due a refund from HMRC you can get the money back that you have overpaid by contacting HMRC to confirm how you would like the overpayment sent back to you, or by managing this within your online tax account.

If you are unsure about your eligibility for payment on account or need support in managing your taxes, a qualified tax professional or accountant will be able to help you.

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