Payments On Account

 

If your total net tax liability for the year is less than £1,000, or if at least 80% of the total tax due for the year is covered by tax deducted at source, then you do not need to make payments on account for the following tax year.
 
The second test is sometimes missed by HMRC and people are asked to make payments on account unnecessarily, resulting in a loss of the use of the money unnecessarily early.
 
Example:
 
John calculates his tax liability at £7,000 for the year 2011/12, of which £1,200 relates to investment income payable under self-assessment. The remainder (£5,800) was deducted under PAYE. 
 
Because his tax liability is over the £1,000 limit, he assumes he has to make payments on account for the following year and hence enters these figures onto his Tax Return.
 
However, as over 80% of his total tax liability is deducted at source under PAYE, he meets the second test and does not need to make payments on account. The tax on his investment income is payable in full by 31 January of the end of the tax year. By being aware of this test, he avoids making payments on account and benefits from the associated cash flow advantage.
 

This is a sample tip taken from our 136 page guide:
101 Ultimate Tax Strategies Revealed.

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