If you are self-employed and earning over £1,000 per year, you are required to complete an annual self-assessment tax return. If your earnings exceed the personal allowance of £12,570, you must then start to pay tax. Once you have calculated your tax liability, and of it is over £1,000 per year with over 80% payable through self assessment, you will make two advanced payments during the course of the year.
HMRC require self-employed individuals to make advance payments on their tax bill, known as ‘payments on account’. The first payment is due on 31 January, and the second payment is due on 31 July. What you owe is based on your previous self-assessment tax bill.
This system has been designed to spread your payments out to make them more manageable and avoid becoming indebted to HMRC. You are automatically enrolled to payments on account when you register as a sole trader. To find out more about how payments on account are calculated, when they are due and how to pay, please read our helpful guide below.
Dealing with self-assessment tax can be a daunting task, and so the help of a professional firm of accountants is hugely reassuring and time-saving. Spotlight Accounting is a tax specialist and helps many small businesses and self-employed sole traders with their tax affairs. To find out how we can help, please get in touch.
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What are payments on account?
In the UK, self-employed people must make tax payments in advance of their next tax bill if it is over £1,000. Payments are made in two instalments, based on the previous year’s tax bill. This is what’s known as ‘payment on account’.
By paying in advance, you essentially have a credit on your account so that you can avoid arrears. Many taxpayers find it more manageable to pay in two instalments, rather than in one lump sum, although you can do so if you wish.
The deadline for the first payment on account is 31 January, and the second payment on account is due no later than 31 July. If you are paying in full, you must do so by 31 January.
Who needs to make payments on account?
All self-employed small business owners who are registered for self-assessment must make payments on account for the following tax year if their previous tax bill totalled more than £1,000.
How are payments on account calculated?
Payments on account are based on your previous tax bill and are split in half over two instalments.
So, if you paid £8,000 tax in the 2022/23 tax year, HMRC will expect a payment of £4,000 by 31 January 2023 for the following year’s tax bill. The remaining £4,000 would be due on 31 July 2023.
When are payments on account due?
Your first payment on account is due at the same time as your self-assessment tax return, which is no later than 31 January. The second payment on account is due no later than 31 July.
Can I pay my tax bill in one lump sum?
You can choose to pay your self-assessment tax return in one payment, no later than 31 January. If you already know what your tax liability will be, you can pay your tax return early, any time after the end of April for the following year.
Do payments on account apply to first-time self-assessment taxpayers?
If you are new to self-assessment, then your first payment on account will be due with your first years tax, this can be a nasty surprise if you are not expecting is as in effect you are paying 18 months tax in one go.
For example:
- Taxable profit = £30,000
- Less personal allowance = £12,570
- Total tax bill = £5,483.48
- First payment on account = your first year’s tax bill in full + 50% in advance of next year’s tax bill
- £5,483.48 + £2,662.44 = £8,145.92 due by 31 January 2023
- Your second payment of £2,662.44 is due on 31 July 2023
What happens if I earn more than the previous tax year?
If you earn more than the year before, you will be required to make a balancing payment no later than 31 January of the following year.
So, if your 2022 tax bill totals £10,000 and you’ve made two payments on account of £4,000, the balancing payment will be £2,000 due by the end of January 2023. This is in addition to your advance payment on account for the 2023/24 tax year, which, in this scenario, would be £5,000.
Spotlight Accounting can take the pain out of the self-assessment process
Calculating your self-assessment-based tax bill is not always straightforward, and mistakes are easy to make if you don’t have a firm grasp of payment on account. That is why many small businesses choose to outsource their tax affairs to a professional accountant.
We know personal tax inside out and will ensure that your tax return is accurate and made on time, including any tax reliefs you are eligible for. We will also help you to forecast and plan for your tax bill, so there are no nasty surprises at year end.
To request a quote, switch to us, or ask a question about payment on account, then please fill in our contact form. We look forward to hearing from you.
FAQs
Is payment on account mandatory?
Yes, payment on account is compulsory for all self-employed UK taxpayers unless:
- your previous self-assessment tax bill was less than £1,000
- you have had more than 80% of the previous year’s tax deducted at source, e.g. through PAYE
Can I reduce payments on account?
If you know you are going to earn less than the year before, then you can make a request to HMRC to reduce your payments on account. However, if you end up earning more than estimated, HMRC may charge you interest on the outstanding balance.
It is worth considering paying the bill in full if you can and waiting for HMRC to refund the difference later on.
When did HMRC introduce payments on account?
Payments on account were introduced by HMRC in 1990 for all self-employed UK taxpayers. The system was designed to avoid arrears and help spread out tax payments to make it more manageable than paying one lump sum in January.
What is a ‘balancing payment’ for self-assessment tax return?
A balancing payment is due when you have underpaid your total tax bill for the previous year. It is due by the end of January, along with your first advanced payment on account for the next year.
