Payment on account advice please

ynwa6

In tax year 2022/23, I was self employed and made pension contributions to bring my taxable income just under £50k.

I then commenced a full time employed position from April 2023. I didn’t realise at the time, but my tax code was incorrect, possibly due to the pension contribution from 22/23. I made a personal pension contributions, again to bring my taxable income to just below £50k.
Because my tax code was incorrect I had been underpaying tax and had a tax liability to pay. I used my previous accountant to calculate my tax bill. They have calculated my tax bill but have also stated I have to pay a sizeable chunk of payment on account due in January and again in July.

As an employed person, paying tax via PAYE, it is necessary to pay payment on account?
can the payment on account be reduced to zero and I settle my tax liability by tax return at the end of the financial year?

Many thanks in advance.

Dazed_and_C0nfused

ynwa6 said:

In tax year 2022/23, I was self employed and made pension contributions to bring my taxable income just under £50k.

I then commenced a full time employed position from April 2023. I didn’t realise at the time, but my tax code was incorrect, possibly due to the pension contribution from 22/23. I made a personal pension contributions, again to bring my taxable income to just below £50k.
Because my tax code was incorrect I had been underpaying tax and had a tax liability to pay. I used my previous accountant to calculate my tax bill. They have calculated my tax bill but have also stated I have to pay a sizeable chunk of payment on account due in January and again in July.

As an employed person, paying tax via PAYE, it is necessary to pay payment on account?
can the payment on account be reduced to zero and I settle my tax liability by tax return at the end of the financial year?

Many thanks in advance.

No.  But you can reduce any POA to the level you expect your 2024-25 liability to be.

For example if you expect to owe £600 for 2024-25 then you could reduce each POA for 2024-25 to £300.

If you get it slightly wrong, and owe say £800, then you would be charged interest on the £100 each POA has been underpaid (from 31 January 2025 and 31 July 2025 respectively until the tax was paid).

One thing people sometimes overlook though is that tax subsequently collected via your tax code reduces amount of the POA, or more commonly, completely cancels the need for them.  This isn't something that is known prior to submitting the return for the year which generates the POA in the first place (2023-24 in this instance).

How much does your 2023-24 return show you owe, just the amount for 2023-24, not any POA seemingly due for 2024-25?

Have you made sure your 2024-25 tax code is as accurate as possible.

Finally, making personal pension contributions as a self employed person (or employee) is very unlikely to have reduced your taxable income.  I suspect you have got confused somewhere with what's really happened.

ynwa6

Thank you for your thorough reply.

I believe it is a combination of issues, the infor on my personal tax account had incorrect information which I believe led to my underpayment last year.

My tax return shows I will need to pay around 2k in January for tax and a POA of 1.2k in Jan and July.

I’m hoping correcting my tax code this year, will correct my tax liabilities and avoid the need for POA, but it seems difficult to calculate this.

Dazed_and_C0nfused

ynwa6 said:

Thank you for your thorough reply.

I believe it is a combination of issues, the infor on my personal tax account had incorrect information which I believe led to my underpayment last year.

My tax return shows I will need to pay around 2k in January for tax and a POA of 1.2k in Jan and July.

I’m hoping correcting my tax code this year, will correct my tax liabilities and avoid the need for POA, but it seems difficult to calculate this.

If you want the POA issue to go away then you could simply file the return now (at the very latest by 30 December 2024) making sure you have indicated at the relevant question that you would like the tax due for 2023-24 to be collected by an adjustment to your 2025-26 tax code. 

If you check your Self Assessment account in a weeks time you should see the outcome of the return being processed and if the tax due for 2023-24 has been accepted as being collectable via your 2025-26 tax code.

If it has then the POA for 2024-25 will be automatically cancelled.  They will be cancelled as POA only exist if you have to pay some tax direct to HMRC.

If you are still earning decent money then chances are the tax due will be included in your code.  It's only if you are not in employment at the moment or have low income that there is likely to be a problem (HMRC have rules about how much tax owed can be included in a tax code).

Finally, don't forget that the tax owed for 2023-24 is only ever included in your 2025-26 tax code.  Any change to your current (2024-25) tax code will be unrelated to the tax owed for 2023-24.  People often seem to misunderstand that part of things.  

There is a separate question on the return about keeping your current tax code up to date. But that is nothing whatsoever to do with tax owed for 2023-24.