Self Assessment Payments on Account

In January and July of each year, many people have to make a payment to HMRC and this causes a lot of confusion. Befuddle is compounded by the fact we have a personal tax year that ends on the 5^thApril. How I explain this to clients is to give them a scenario that relates to an everyday occurrence as this clearly illustrates how the payments-on-account system works.

I want you to imagine you decide to visit a nice restaurant for your birthday … and this birthday falls on the 5^th April. Let’s assume it is the 5^th April 2014 and the bill came to £1,000. I know that seems a lot for dinner, but if you go to The Fat Duck it will only purchase two starters and a side order of bacon-flavoured ice cream.

So you have been to the restaurant, enjoyed your deep-fried hamster with leprosy chips and now you want to pay the bill. The restaurant owner tells you not to worry; you can pay the bill in January 2015. So you put the money aside every month with a view to settling your affairs when you receive a phone call,

“Good morning, as today is the 31^st January 2015, we would be grateful if you could give us the £1,000 you owe us. And also, we’re pretty sure you will visit again this year on your birthday, so please let us have another £500 on top as an advance payment of 50% of your last bill”.

It might seem a bit harsh, but it is the top restaurant in Britain and so you pay up and also book another table for your birthday on the 5^th April 2015.  This time the bill comes to £1200 as you had the same meal as last year, but with a dandruff frosting.

Nothing really happens for a couple of months and then at the end of July 2015, you get another phone call from the restaurant.

“Good morning, please can we have £500 towards the bill from your birthday dinner a couple of months ago and we hope you enjoyed the crushed guinea fowl in tarantula sorbet”. Now, this is all very odd as the bill was actually £1200, but the dinner really was very special and you don’t want to lose your table by upsetting the manager. You pay up and everything goes quiet until a month after Christmas 2015 when the phone rings again,

“Good morning, please can we have the £200 you owe us from your birthday dinner last April and, while you’re at it, we would also like £600 on top as an advance payment of your next dinner in April 2016”.

As you can see things have now got very confusing. Not once have you ever really just paid the bill and you are always going to be paying a bit up front, a little bit later and the balance will be paid 6 months after that. Unfortunately none of those payments will actually fall on the 5^th April. The only real solution to this problem is to have your tax return filed before the end of July each year and to pay the balance off all in one go. However, even that would mean you still have to make a payment on account in the next January. Yes it is all a bit bizarre.