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.

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 payment on account helps the self-employed spread out their tax 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 2019 to 2020 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 2021 is £2,700. This includes:

your ‘balancing payment’ of £1,200 for the 2019 to 2020 tax year (£3,000 minus £1,800)

the first payment on account of £1,500 (half your 2019 to 2020 tax bill) towards your 2020 to 2021 tax bill

you have to pay your second payment on account of £1,500 by midnight on 31 July 2021

If your tax bill for the 2020 to 2021 tax year is more than £3,000 (the total of your two payments on account), you’ll need to make a ‘balancing payment’ by 31 January 2022.

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 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 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 taxpaying process online as possible. This means that from April 2023, 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 your payment on account reduced.

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.

In practice, many people choose to do this if they’re having trouble paying their tax bill. Some reduce their 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.

On the other hand, if you overpay, HMRC will refund you. 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.

Reducing payment on account in 2021

To help support Self Assessment taxpayers who are struggling to pay because of coronavirus, the government has announced that you can defer your tax payment due on 31 January 2021 by up to 12 months.

The government previously let you defer the payment on account due on 31 July 2020 to 31 January 2021, so this means you’ll be able to defer your:

second 2019-20 payment on account (due on 31 July 2020)

balancing payment for tax year 2019-20

first payment on account for 2020-21

If you owe up to £30,000 you can use HMRC’s Time to Pay online service to apply for an extension, without having to call HMRC.

But as interest will be added to the balance from 1 February, if you can make your payment, you should.

Contact the Team at Cangaf for further assistance.