Let’s Break This Down Together...
Feeling confused about why HMRC wants tax in advance or unsure why your bill suddenly doubled in January? Payments on account feel like one of the most baffling parts of being self employed.
This guide walks you through what payments on account are, when they apply and how the deadlines work. It also explains how they are calculated, how to reduce them and the common problems that catch people out.
By the end, you will know exactly what to expect and how to plan ahead without the stress. Let’s find out.
What exactly is payment on account?
Payment on account is HMRC’s system for collecting tax in advance from self-employed taxpayers. If you are self-employed or have significant untaxed income, you may be required to make payments on account. Think of it as paying your tax bill in instalments rather than one lump sum.
It kicks in when your Self Assessment tax bill exceeds £1,000. You are automatically enrolled to make payments on account if your tax bill meets this threshold. This threshold includes Income Tax and Class 4 National Insurance contributions, but not student loan repayments or Capital Gains Tax.
The system splits your expected tax bill into two equal payments. These payments are calculated based on your previous year's tax bill, which includes your total tax bill for that period. You’ll pay half by 31 January and the other half by 31 July.
Account example: If your estimated earnings for the previous year resulted in a tax bill of £2,000, you would make two payments on account of £1,000 each for the upcoming tax year.
If most of your tax has already been deducted at source through PAYE on your employment income, you may not need to make payments on account.
Payments on account are designed to ensure that self employment and other untaxed income are properly taxed throughout the year.
When do you need to make these payments?
The first payment is due by midnight on 31 January, the same day as your balancing payment for the previous tax year. These payments are based on your previous year's income tax liability. This can make January a particularly expensive month!
Your second payment is due by midnight on 31 July. Each payment equals 50% of your previous tax bill. This helps you spread the cost of your tax bill for the upcoming tax year.
If you’re newly self-employed, you won’t make any payments on account until after your first tax return. This means your first January payment will be larger than usual.
It’s worth noting that payments on account only cover Income Tax and Class 4 National Insurance. Other taxes like Capital Gains Tax must be paid in full by the January deadline. Good planning is key to avoiding piling up payments.
