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Self Assessment: What Is Payment on Account?

Author Osome Content TeamOsome Content Team

4 min read
Money Talk

If you’re self-employed and your tax bill is more than £1000, you pay a payment on account. This is, essentially, paying your tax in advance on expected earnings. It’s quite a big extra chunk of money on top of your tax bill. But don’t fret, it can be managed.

Self Assessment: What Is Payment on Account?

Self-assessment (SA) can be confusing at the best of times. From the outside, for all the government says about how easy they’re making it to do it yourself, it’s a complicated and confusing process. Added to that is the fear of getting your tax accounting wrong and that HMRC is watching your every move. You genuinely want to do it right, but what if you do get it wrong?

At Osome, we hear about these frustrations and worries all the time. One of the questions that often pops up is “What is payment on account?”. For those who have never filed a SA return, this extra sum attached to tax owed often comes as a surprise.

So let’s take a closer look at what a payment on account is, why it’s there to help you, and how to go about paying it.

What Is Payment on Account?

Payment on account is a proactive income tax payment for self-assessment taxpayers. Essentially, the government would like you to pay your anticipated tax for the following tax year in two instalments.

The first instalment is due by midnight on January 31 (the self-assessment tax deadline) and the second one by midnight July 31.

Do I Have To Make A Payment on Account?

If you’re self-employed and your tax bill is more than £1000, then yes, you do. The exception to the rule is, as the gov.uk site puts it: “You’ve already paid more than 80% of all the tax you owe, for example through your tax code or because your bank has already deducted interest on your savings.”

Confusing? We are dealing with the government here after all, so…yeah, a bit confusing. Look at it this way - it’s safe to assume that, if you’re self-employed and are over that £1000 tax threshold, then in all likelihood you’ll have to make a payment on account.

How Is My Payment on Account Tax Figure Determined?

No one can see into the future, so how do you know how much tax you’re going to be required to pay next year? HMRC simply takes the tax amount from your previous year and anticipates that your self-employed earnings will be the same in the next year.

Why Does Payment on Account Exist?

HMRC wants you to think ahead and forecast your tax bill. By getting you to put money aside for tax ahead of the time it’s due, you won't get caught short when it’s time to pay your tax. The payment on account is meant to smooth the transition between different tax years.

Employers put their employees through the Pay As You Earn (PAYE) tax system, which means their earnings are taxed immediately. Being self-employed, HMRC is trying to give you a little bit of flexibility on your cash flow, so you don’t have to pay your tax straight away.

What if I Earn Less Than I Did the Previous Year? Have I Paid Too Much Tax?

Yes. But there’s a fix for that. You’ll get a tax rebate and the following year, your payment on account will reflect your profit this year. So, there’ll always be a little bit of fluctuation, but the idea is you get into a regular semi-annual rhythm of payment.

But if you know your tax bill will be lower than last year, maybe you’re taking a sabbatical and sailing the Mediterranean for the summer, then you can request a lower payment from HMRC with an SA303.

And If I Earn More Than Last Year?

If you owe more than your two payments on account that you made in the previous year…congratulations! You’re business is doing well! But before you blow all your profits on a party, make sure you put money aside as you’ll need to make a balancing payment by January 31st (with your first payment on account payment for the following year) to pay the extra tax.

When Should I Pay for My Self-Assesment?

The earlier you can pay it the better. You minimise the chance of a mistake being made or incurring fines.

What if I Can't Pay on Time?

You’ll likely face interest charges. The best thing to do is get in touch with HMRC before this happens and flag it with them. See if you can arrange a Time To Pay agreement. They’ll be sympathetic to your cause if they don’t have to spend time chasing you.

How Do I Pay My Payment on Account?

To make your payment on account you need to be registered for self-assessment which will provide you with a Unique Tax Payer Reference (UTR). With your UTR there are several ways you can pay:

  • At your bank or building society
  • At your post office
  • CHAPS or bacs
  • Direct debit online
  • Online banking
  • Telephone banking

Statista reports that as of April 2022, there were 4.21 million self-employed people in the UK. Like it or hate it, the government put the payment on account in place to help all 4.21 million of us.

If you take the information in this article and run your business with a long-term view, payment on account will just turn into a manageable semi-annual tax payment that shouldn’t cause you too much grief.

But if it is causing you grief or you’d like to switch your accountant to an adviser that really gets it, we’d love to chat.

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