Self-assessment payments on account

Sep 22, 2023 | Business advice, Business tax

Payments on account are tax payments that many self-assessment customers must pay towards their next tax bill each year.

This system can help alleviate tax headaches and cash flow issues for self-employed individuals, landlords, company directors and anyone else who files a self-assessment tax return.


What are payments on account?

Payments on account are advance contributions toward your upcoming tax liability, which includes Class 4 National Insurance if you’re self-employed. They’re due twice annually – on January 31, which coincides with the end of the tax year, and on July 31, the midpoint of the current tax year.

If you complete a self-assessment tax return, you’ll be required to make two payments on account to HMRC each year, unless:

  • your last self-assessment tax bill was less than £1,000
  • 80% or more of your tax was deducted at source through PAYE


Why are payments on account so important?

The primary function of payments on account is alleviating the cash flow burden associated with annual tax obligations. Making these advance payments on time is also essential if you want to stay compliant with your tax obligations.

While you may not have much choice on the matter, paying in two smaller installments can often be easier to paying a large lump sum in one go.


How are they calculated?

The calculations for payments on account are usually set at 50% of your previous year’s tax liability.

Here’s a closer look:

  • First payment: The initial payment is due by January 31 and represents the first half of the estimated tax due for the current tax year.
  • Second payment: This payment falls on July 31 and accounts for the remaining half of your projected tax liability for the year.

These payments exclude other financial obligations, like capital gains tax (CGT) or student loan repayments – you need to pay those in your balancing payment.


What If my income changes?

Life is rarely static, and your income levels can fluctuate for numerous reasons – whether it’s due to the loss of a client, a lucrative new contract, or changes in your business model.

If you experience a significant change in your income, you can ask HMRC to adjust your payments on account. There are different ways to do this, so we’d always recommend speaking with a trusted tax professional first. Your agent could even handle communications with HMRC for you so you don’t have to stress.


Managing your payments on account

The payments on account system doesn’t change the amount of tax you owe overall – it just spreads the cost.

If you want to stay on top of your payments on account, here are our key takeaways:

  1. Plan ahead: Making a note of all your payments on account dates and expected payments can help you budget effectively and avoid any last-minute financial stress or penalties.
  2. Be accurate: You don’t have to take on the extra admin yourself – a reliable accountant can accurately estimate your tax liability and ensure you pay your bills on time, every time.
  3. Stay updated: It’s important to keep an eye on your income and any new legislation so you’re always up to date with your compliance requirements.

If you’re in any doubt, contact an account who can help you assess your income, save up for your tax bill and stay compliant.

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