How do Advance Tax Payments Work?

by | Jan 18, 2022

Are you self-employed or have a business from which you earn dividends? If your UK tax bill is more than £1000 for a tax year and you pay less than 80% of your income tax at source i.e. salary income from which PAYE is deducted, HMRC will ask you to make advance tax payments, which will go towards your tax bill for the following tax year.

Advance tax payments are done in two instalments:

  • The first 50% needs to be paid by 31 January following the end of the tax year
  • The second 50% needs to be paid by the end of the following July.

Let’s look at an example to understand how advance tax payments are calculated

John was self-employed in the 20/21 tax year and made a taxable profit of £20,000. He owes HMRC £3000 in tax.

Firstly, the 20/21 tax year covered the period 6 April 2020 to 5 April 2021, so John needs to pay the £3,000 tax by 31 January 2022.

Because 31 January 2022 is already 10 months into the new tax year 21/22, HMRC wants him to pay an additional 50% of his 20/21 tax bill by the 31 Jan 22 additional to the £,3000 tax bill, which will go towards his 21/22 tax bill. HMRC will then ask him to pay another 50% advance by 31 July 2022.

John will need to make the following payments:

By 31 January 2022:

Tax: £3,000

Advance: £1,500

Total due by 31 January 2022: £4,500

John also needs to pay another £1500 by the end of July 2022, i.e. the second advance payment.

This means that by 31 July 2022, John has paid all his tax and a total of £3000 advance that will go towards his 21/22 tax year.

If John’s taxable income remains the same, at £20,000 in the 21/22 tax year, with his tax bill at £2,800 (slightly lower because of changes in taxable income thresholds), then this will mean that John has already paid his tax bill for the 21/22 tax year with the advance payments and then HMRC will owe him £200. John will, however, need to make advance payments of 50% of £2,800 (£1,400) by 31 January 2023 and another 50% of £1400 by 31 July 2023 which will go towards his 22/23 tax bill again. The £200 HMRC owes John will be deducted from the amount John needs to pay by 31 January 20123 Thus he only needs to pay £1200 by the end of January 2023 and then £1400 by 31 July 2023.

If John did not work in the 21/22 tax year and therefore had no tax bill, then the HMRC will refund him his full £3,000 advance he paid.

Advance payments do not affect people whose only source of income is a salary. It will only affect self-employed / director’s / shareholders / buy-to-let landlords when their tax bill is more than £1,000. If your tax due to HMRC is less than £1000, then you don’t need to make advance payments.

You can also ask HMRC to reduce payments on account if your income will decrease significantly in the following tax year, but it is best to discuss this with us on a case-by-case basis.

Payments on account or advance payments are complex areas. Luckily, the TaxDash online portal clearly outlines when you need to make advance payments and will also show you due dates, which means you also know when any payments are due.