Self Assessment is daunting enough, without there being another – often-overlooked – tax bill due in January.

Payments on account are frequently not taken into account by the self-employed. It’s easy to get caught up in submitting your SA tax return, without remembering this extra bill.

Another tax bill?! We hear you cry. Yes, but if you plan ahead, it’s not too painful.

Today, we’re talking all about Payments on Account so you’re ready on January 31.

What are Payments on Account?

Two payments on account are due each year (31 January and 31 July). They are advance payments towards future tax bills and they are based on your previous tax bills.

The calculation HMRC uses is:

Current year’s tax bill total ÷ 2 = the amount you pay on account.

Usually, this is roughly split between January’s payment and July’s.

For example, if your current year’s tax bill is £2,000. This is how much you’ll pay on account.

£2000 ÷ 2 = £1000

So this is what your payments would roughly look like (excluding National Insurance and any other payments like Student Loans in this example for simplicity).

31 January 

Tax bill = £2000

Payment on account 1 = £500

31 July 

Payment on account 2 = £500

Do I need to make Payments on Account?

Probably yes. It’s mandatory for most sole traders, small business owners and full-time freelancers need to make Payments on Account.

There are only two exceptions to the rule:

  • If your last SA tax return bill was less than £1,000.
  • If you have paid more than 80% of your tax ‘at source’. For example, a third-party, such as your employer, collects the tax and pays into HMRC for you. However, if you’re self-employed, it’s likely you won’t be paying much of your tax at source.

Why do Payments on Account exist?

Payments on account might seem a bit harsh, especially if it’s your first time making a payment on account, but it was designed by HMRC to help small business owners and taxpayers spread the cost of the following year’s tax bill.

After the first year of making payments on account, you should be able to see some benefit from it as it means that you’ve already paid some of your tax bill for the next year, which is always a bit of weight lifted from your shoulders.

How do I make payments on account?

You pay payments on account in the same way as you pay HMRC. There’s no need to calculate it for yourself, as HMRC will do this for you.

However, many digital accounting platforms will tell you what you owe based on your income and expenses.

What if I don’t make my payments on account?

Like with other tax bills, there’s a penalty for late payments. Currently, if your payment on account is over 30 days late, you’ll be fined 5% of the unpaid tax amount. A further 5% is added after five months and again at 11 months if the tax is still unpaid.

How do I avoid being caught out by Payments on Account?

Plan ahead and use digital accounting software to keep track of what you owe. Don’t leave your SA tax return to the last minute – as this often results in nasty surprises.

The earlier you submit your tax return, the longer you’ll have to prepare for the tax bill and payments on account in January.

If you want to find out more about Payments on Account, or need help with your Self Assessment tax return, get in touch with a member of our team today