Keeping Self Assessment Simple: Payments on account

An easy guide to tackling payments on account for taxpayers undertaking self assessment

Payments on account were introduced to help stagger tax payments and make the cost of self assessment manageable. However, over the years, this initiative has proven a common stumbling block for the self-employed resulting, for some, in annual frustration and a potential threat to cash flow.
 

What are payments on account?

By the 31st January deadline each year, you must have filed your tax return and paid any taxes due. However, those with a self-assessment tax bill of over £1,000 may be required to make a payment on account.

Payments on account are calculated using your previous year’s tax bill and are paid in two instalments due 31st January and 31st July. This allows for two advance payments to be made towards each year’s tax bill.

Because HMRC cannot predict exactly how much tax will be due each financial year, it is assumed that each taxpayer is consistently earning the same. However, income tends to fluctuate, and this is often not the case.
 

So, how is the payment on account calculated?

Essentially, any payment on account due is equal to half of the previous year’s tax bill.

If it’s the first time your tax bill amounts to over £1,000 or if it is your first year of trading, you need to know what to expect the first time you make a payment on account. 

For example, if your tax bill is £1,400, you’d have to make your first payment on account for the 2022/23 tax year due to the amount being over £1,000. This is calculated as half of the amount due for 2021/22.

In this case, that would be £700. This means that you’d owe a total of £2,100 to HMRC on 31st January 2023.

A further £700 would then be payable 31st July 2023 (the second payment on account).

It should be noted that Class 2 National Insurance contributions are not included in the calculation for payments on account. This is deducted before dividing your tax bill by half.

For simplicity, this hasn’t been taken into account in the calculation.

Can I reduce the payment on account due?

Whilst it is possible to reduce your payment on account, you should remember that they are based on your earnings from the previous year. Should your income decrease significantly then your payments on account may be reduced as a result to reflect this lower income.

If this is the case, you can claim a reduction on your payments on account. However, if you make too much of a reduction, you may incur an interest charge on any tax shortfall.
 

What if I can’t afford my payment on account?

Inform HMRC as soon as possible. Missing the deadline without informing them means you’ll start to accrue interest and late payment penalties.

Once informed, HMRC may agree a time to pay arrangement. In these circumstances, you will still be charged interest but may stand to avoid any penalties.
 

How to pay

HMRC’s Making Tax Digital initiative serves as encouragement for those completing self assessment to do so online in an attempt to make tax returns simpler and more efficient.

Online: Can be completed via the HMRC website or commercial digital software.
Those filing self-assessment online will be able to make their payment on account at the same time.

Paper return: If you are submitting your return via a paper return, you will receive a paper bill with a Bank Giro form for you to make your payment. 

Consider making regular checks ahead of the deadlines on interest rates and other changes in order to avoid any penalties. For anything else self assessment, take a look at Qdos’ Essential Guide to Self Assessment.

Find out more about Qdos’ partnership with GoSimpleTax here.