The way the Inland Revenue handles payments on account and closing tax payments once books are closed on the tax year continues to puzzle me. This is my current understanding.
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Take the reference date to be today, June 1st 2009.
In the tax year 07/08 I earned £X with tax T(X).
In the tax year 08/09 I earned £Y with tax T(Y).
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In January 09 I paid my first 'on-account' amount of T(X)/2 forward projected from 07/08 into 08/09 as the IR's best estimate of the tax I would pay in 08/09.
In January 09 I also paid the balance of my o7/08 tax, i.e. T(X) minus whatever I had paid previously on account in January and July 2008 (further explanation below).
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In July I have to pay the second "on account" amount T(X)/2. *
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In January 2010 I have to pay the balance of my tax for 08/09 = T(Y) - T(X)
--- [T(X) = the two 'on-account' payments].
In January 2010 I also have to pay my first 'on-account' payment for 09/10 which is computed by the IR as T(Y)/2. The second equal installment will be paid in July 2010.
There. Clear now?
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* But last year the Inland Revenue increased the amount I had to pay 'on account' in July 08 based on the return which I completed in May 08 for tax-year 07/08. The IR concluded that they had under-estimated in 06/07 how much I would make in 07/08 and they clawed back the excess immediately, rather than waiting until January 31st 2009.
I have no idea what their criteria are for doing this, but I know you are obligated to tell the IR ASAP after the end of the tax year if the sum of the two on-account payments for that tax year are less than the tax you actually owe (once you've worked it out).
