Payments on account: What are they and why do we make them?
Posted on 1st January 2023
If you complete a self-assessment tax (SAT) return then your payment on account is due by 31 July. Many people aren’t clear what this payment is for or how it’s calculated, so here are answers to some of the questions we are most frequently asked.
What is a payment on account?
The self-employed and people with income outside of paid employment, such as private landlords, must make a SAT return every year. The payment on account process is intended to help them manage their tax payments because they are made in arrears.
While employed people are taxed at source through the pay as you earn (PAYE) scheme, as a self-employed person you don’t start paying your tax bill until the January after the end of the previous tax year in April.
HM Revenues and Customs (HMRC) works out the amount you will pay based on what you earned in the previous tax year. These payments on account are due twice a year.
When do I make payments on account?
The payments are due in two instalments by 31 January and 31 July each year for the tax year that ended the previous April.
It can be quite confusing because your first instalment is due on the same date as the deadline for submitting your SAT return for that year.
In addition, if you earned more than HMRC predicted in the previous year, you must also pay an additional balancing amount on 31 January. If you earned less than predicted, you will receive a refund.
We encourage our clients to work with us to complete their SAT return as soon as possible. Then they will know how much each instalment will be and can make sure they have enough to pay.
Here’s an example: It might help…
Each of the two payments on account will normally be half of your previous tax bill.
Example:
Your bill for the 2020 to 2021 tax year is £3,000. You made 2 payments of £900 each (£1,800 in total) on account towards this bill in 2020.
The total tax to pay by midnight on 31 January 2022 is £2,700. This includes:
your ‘balancing payment’ of £1,200 for the 2020 to 2021 tax year (£3,000 minus £1,800)
the first payment on account of £1,500 (half your 2020 to 2021 tax bill) towards your 2021 to 2022 tax bill
You then make a second payment on account of £1,500 on 31 July 2022.
If your tax bill for the 2021 to 2022 tax year is more than £3,000 (the total of your 2 payments on account), you’ll need to make a ‘balancing payment’ by 31 January 2023.
The same thing happens every year, which is why you usually see a balancing payment on your tax bill in January.
How do I make my payments on account?
The important thing to know is that you need your tax payment reference number. This is your Unique Taxpayer Reference (UTR) number followed by the letter ‘K’.
You can make your payments on account:
online using a debit card
via bank transfer (online or phone banking)
by setting up a Direct Debit, but make sure you leave enough time for the transaction to be processed before the deadline. It will normally take five working days when you set one up
at your bank or building society if you still receive paper tax statements or you have received a paying-in slip from HMRC
by sending a cheque in the post.
Can I reduce payments on account?
Many self-employed people find that their annual income can be very different from year to year.
If you think that your income for the next tax year will be much lower than the previous tax year, you can apply to have your payment on account reduced.
Your agent can do this for you or you can do it yourself using your online HMRC account and selecting 'Reduce payments on account'. Alternatively, you can send a paper form (SA303) to your tax office.
However, if you’re considering taking this step because you are struggling to pay your tax bill, but you continue to earn the same amount, you will have a bigger bill to pay the following year and will also have to pay interest on the outstanding amount.
Can I check my payments on account?
You can access your personal tax account online to check your payments using your Government Gateway ID. You can view your latest SAT return, any payments on account you've already made, and the payments you must make towards your next tax bill.
If you would like any advice about your self assessment tax return or your payments on account please get in touch.
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