If you’re self-employed or work as a sole trader, you might have just received your HMRC income tax statement, showing a final payment due on 31st January for the 2022/23 tax year and your first payment on account, due on the same date, for 2023/24.
Payments on account are often seen as confusing, and many newly self-employed taxpayers are unaware they are expected to make payments on account for the current trading period – even if they haven’t yet calculated their tax liability!
The SAS team has put together this guide to explain how it all works and how to make payments on account to ensure you keep your tax affairs up to date.
How Do Payments on Account Work for Self-Employed Taxpayers?
HMRC levies payments on account to split up your tax obligation for the year. Rather than paying 100% of your income tax liability on 31st January, you make a contribution towards the anticipated amount owed, which can then be adjusted if you’ve earned more or less than in the previous year.
In short, it works by splitting your payments into two:
On 31st January, the same date your tax return is expected, you pay the final amount owing for the previous tax year and an initial payment towards the current period, which is due to end the following April.
On 31st July, you then make a second payment on account for the previous tax year based on your returns.
Almost every self-employed person will be expected to make payments on account unless you earned under £1,000 through self-employment in the last tax year, or 80% or more of your total tax was paid through automatic PAYE deductions.
Understanding the Income Tax Payment on Account Calculations
The tax office works out your payments on account based on 50% of your tax bill for the last year. Therefore, if you owe £2,000 in period one, you will pay an extra £1,000 on account for period two, assuming you will earn a similar amount in the following year.
Second payments on account are also based on 50% of your tax obligation in the previous tax year. When you submit your self-assessment tax return, HMRC will calculate the difference, refunding an overpayment or raising a final bill for the balancing value.
If you are owed a rebate, that doesn't mean you won't make payments on account again, but that your next charge will be based on 50% of your most recent tax bill, and so on.
How to Make Payments to HMRC for Self-Assessment Account Contributions
Paying your tax bill on time is essential to avoid penalties and interest charges – so it’s best to set up remittances a little in advance where possible. However, you can also pay through your HMRC self-assessment account by logging in with your Government Gateway credentials and paying via online banking or a debit card on the same day.
If you're intending to pay on the due date, make sure you process your payment in the morning or preferably the day before to give sufficient time for HMRC to register and receive the remittance. The portal provides details for online banking payments, along with a reference code you should use to ensure your remittance matches your account.
Payments by BACs take around three working days, so they should be sent accordingly to give enough time before the payment deadline.
Another option is to create a one-off direct debit through the HMRC portal – you can do this in advance at any point, although this is only suitable if you have at least five working days from your payment cut-off point.
There is also the alternative of setting up weekly or monthly contributions towards your self-assessment tax bill, allowing you to split the liability and make smaller payments before the amount falls due.
Managing Unnecessarily High Payments on Account
In some circumstances, you might find that your payments on account are far above what you expect your tax bill to be for the current trading year – normally because you had a particularly busy year and declared a higher income for the previous tax period.
Should this happen, you can notify HMRC and request that your payments on account be reduced to avoid higher than necessary payments and waiting to claim a rebate.
Self-employed taxpayers can notify HMRC through their online account, clicking on the link to view their most recent self-assessment return and selecting the ‘reduce payments on account’ function. You may also submit form SA303 by post if you cannot access your online account.
If you'd like further information about your self-assessment tax statement, the amounts you have been asked to pay on account, or calculating your future self-employment tax liabilities, please get in touch with the SAS Accounting team at any time.