Payments on account

Payment on account refers to additional self assessment payments that self-employed people need to make towards their next tax bill.

This is HMRC’s way of making sure self-employed individuals are making 6 monthly contributions to their taxes, rather than paying all of their tax due in one go.

What is payment on account?

If you are self-employed, payments on account are tax payments made twice a year. It is to spread the cost of the upcoming tax bill.

They’re calculated based on your previous year’s tax bill. In other words, HMRC is making a prediction about your future income based on your past income. They’re due in two instalments – the deadlines are 31 January and 31 July.

This means the first instalment is due on the same day you submit your Self Assessment tax return and clear your bill for the previous year, so it’s important you have enough money set aside.

How does HMRC payment on account work and when do I have to pay my tax bill?

The first payment date is midnight on 31 January. That’s prior to the end of the tax year in question. It’s calculated by looking at your previous year’s tax bill. The deadline for the second installment is midnight on 31 July, after the end of the tax year in question.

This spreads your payments out over the course of the year. They receive in effect a forward payment by the summer.

Each of your installments will usually be 50% of your previous tax bill. For example: You owe £50,000 in tax for the first time under self assessment for the 2021/22 tax year. This is due for payment on 31 January 2023. You would have to make a first payment on account of £25,000 by 31 January 2023. Then another £25,000 by 31 July.

My tax bill is lower than last financial year, how to reduce payments on account?

It can become problematic if you earn a lot of income one year and this then drops significantly the next. You may foresee a cash shortage if you know for certain that your tax bill will be lower than the previous year. You’ll need to request that HMRC reduce payments on account.

Be warned, don’t reduce your payments on account by too much in your tax account. HMRC will charge you interest and penalties for underpaying. Alternatively, HMRC can refund you if your payments are greater than your total tax bill.

This excludes sums you may owe for capital gains or student loans. Instead, these items are covered in your balancing payment.

Why you should get your tax return in early

Being tax efficient is a process that starts with your tax return. So why should you submit your return early?

1. Refunds

Filing your tax return early (before the 31 January deadline) will mean you should receive any tax refund you may be due, soon after submission. In instances where you think you have overpaid tax, be sure to get your return in as promptly and early as possible. That way you can obtain your refund sooner.

2. Payment and cash planning

Filing your tax return results in a tax liability calculation. This presents you with the total tax bill you owe to HMRC. Doing so earlier means you can plan. That way you can give yourself more time to set money aside for payment. This allows you to better manage your cash flow and finances.

Also, if your tax liability comes in under £3,000 and you submit your tax return in December, then you have the option of your tax liability being paid through your tax code. It will be deducted from your wages or pension at whatever interval arrangement you have set up (weekly or monthly).

3. Tax planning – how to reduce payments on account

Your income might vary markedly from one year to the next. Whether a significant increase due to a dividend payment or, a steep decline as a result of trading losses, early submission provides more time for tax planning.

That means you (and/or your advisor) have sufficient time to assess your circumstances. You can then assess where you might be paying more tax than you legally should be. Savings might then be achievable.

4. Errors and dealing with HMRC

Rushing your tax return in just before the deadline is risky. It’s more likely to lead to errors. There’s likely to be less time for checking the accuracy of what is stated compared to your income streams. You’ll need time to assemble financial documents and bank statements to fill in your return properly. If HMRC uncover errors you’ll be subject to penalties.

5. Your tax advisor/accountant

Your accountant will likely deal with a lot of tax returns on behalf of their clients. Especially in January! If you provide your information close to the deadline then you could end up rushing when collating information and missing out key items from the data you supply. The risk then is a late filing. A situation your accountant might not be able to avoid.