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What is payment on account? A guide for the self-employed

5-minute read

What is payment on account? A guide for the self-employed
Sam Bromley

Sam Bromley

8 September 2021

This article was updated on 30 September 2021

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

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What is payment on account?

Payments on account are tax payments made twice a year by self-employed Self Assessment taxpayers to spread the cost of the upcoming year’s tax.

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.

What does payment on account mean?

The payment on account meaning is simple – it allows self-employed people to make two advance payments towards their tax bill each year.

HMRC has designed payment on account to help the self-employed stay on top of their payments – and so that they don’t benefit too much from paying tax in arrears.

Whereas employed people are taxed at source through PAYE, the self-employed don’t pay their tax bill until the January after the end of the previous tax year.

But payment on account ends up catching many newly self-employed people out. It’s easy to see why – after the annual rush to complete a Self Assessment, it’s not fun to be presented with a bill that’s a lot higher than you’re expecting.

And while in theory tax payment on account helps the self-employed spread out their bill, it can lead to more financial hardship for those who’re already having difficulty paying.

Here’s a payment on account example

Each of the two payments on account will normally be 50 per cent of your previous tax bill. Gov.uk uses this example calculation:

Your bill for the 2020 to 2021 tax year is £3,000. You made two payments on account last year of £900 each (£1,800 in total).

The total tax to pay by midnight on 31 January 2022 is £2,700. This includes:

  • your ‘balancing payment’ of £1,200 for the 2020 to 2021 tax year (£3,000 minus £1,800)
  • the first payment on account of £1,500 (half your 2020 to 2021 tax bill) towards your 2021 to 2022 tax bill
  • you have to pay your second payment on account of £1,500 by midnight on 31 July 2022

If your tax bill for the 2021 to 2022 tax year is more than £3,000 (the total of your two payments on account), you’ll need to make a ‘balancing payment’ to settle the bill by 31 January 2023.

Payments on account include Class 4 National Insurance Contributions where applicable, but not student loan repayments or capital gains tax.

You won’t need to make a payment on account to HMRC if:

  • your tax bill for the previous year was less than £1,000 after PAYE
  • 80 per cent or more of your tax was deducted at source through PAYE

How to pay your payment on account

You’ll need to use your payment reference when you pay your payment on account. This is your Unique Taxpayer Reference (UTR) number followed by the letter ‘K’.

Here’s how you can pay your Self Assessment payment on account:

  • online using a debit card or corporate credit card
  • bank transfer (online or phone banking) or Direct Debit (make sure you leave enough time for a Direct Debit to go through – five working days the first time you set one up, or three the next time you pay using the same bank details)
  • at your bank or building society (if you still get paper statements from HMRC, or you have the paying-in slip HMRC sent you)
  • by cheque through the post

Read more about the methods for paying your Self Assessment at gov.uk.

As mentioned, you’ll need to make your first payment on account by 31 January, giving you the opportunity to pay at the same time as clearing your bill for the previous tax year.

You’ll then have to remember to make your second payment on account by 31 July.

If you file your return on paper, you’ll get a paper bill along with a Bank Giro form that you can use to make a payment.

HMRC is committed to moving as much of the tax paying process online as possible. This means that from April 2024, Self Assessment taxpayers will need to keep digital records and send returns using the appropriate software.

Can you reduce payments on account?

Being self-employed, your income can fluctuate from year to year. If you think that your income for the next tax year will be lower than the previous tax year, you can apply to have HMRC reduce payment on account for your business.

You can reduce payment on account by logging into your online HMRC account and clicking 'Reduce payments on account'. Or, you can send form SA303 to your tax office.

Bar owner on phone to HMRC

In practice, many people choose to do this if they’re having trouble paying their tax bill. Some reduce their HMRC payment on account, presuming they’ll be in better financial shape later and that they’ll find it easier to settle the remainder of their bill.

But you should think carefully about this – if your income is the same or higher in the next tax year, you’ll still have to pay the same amount, meaning you’ve only delayed the burden.

And if you reduce your payment on account and it then turns out you’ve underpaid, you’ll have to pay interest on the outstanding amount. This can significantly increase your tax bill.

What happens if you overpay?

On the other hand, if you overpay, you’ll receive an HMRC payment on account refund.

You can use form SA303 to reduce your payments on account and request a refund. Credit should then show up in your Self Assessment account, which you can then request to be repaid either online or by calling HMRC.

Check your payments on account

As well as using a payment on account calculator, you can check your payments on account during the year by signing in to your personal tax account using your Government Gateway ID and selecting the option to view your latest Self Assessment return.

Click 'View statements' and you'll see any payments on account you've already made, alongside payments you need to make towards your next tax bill.

If you’re having trouble paying, don’t ignore the situation. It’s important that you get in touch with HMRC – you might be able to use HMRC’s Time to Pay service to set up a payment arrangement.

HMRC is committed to working with taxpayers to clear their tax debt as soon as possible following the coronavirus pandemic. But it says that if you can pay, you should.

As ever with tax, if you’re unsure, you should get in touch with an accountant or HMRC directly for guidance. Please use this article as a guide only.

Still unsure about payment on account? Ask your questions below and we'll do our best to help.

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