Small Business Accounting

What is Payment on Account and How Do I Pay It

Our guide covers what are payments on account, how to pay it, late payment penalties and other key information you need to know

By

Chris Andreou

payment on account

What are Payments on Account?

Paying your taxes can seem complicated, particularly if you're new to filing your self assessment tax returns. There are numerous elements you need to understand and stay on top of, and one of these is the payments on account.

Payments on account are a common practice in various business transactions, particularly in situations where the seller requires payment upfront, or the buyer wants to secure the goods or services in advance. So, what is it, exactly? The answer is quite straightforward: A payment on account is an advance payment made by individuals or businesses toward their future tax liabilities.

Tax authorities may require taxpayers to make these interim payments based on their estimated income or profits. The purpose is to ensure regular and timely tax payments throughout the year, rather than a lump sum payment at the end.

Payments on account are advance payments for your self assessment tax bill that are spread out across the year. When you're self-employed or have income that isn't taxed through your pay, rather than paying your entire tax bill in one lump sum, HMRC requires you to make two separate payments on account towards your upcoming tax liability. These payments are typically due on January 31st and July 31st, each covering half of your previous year's tax bill.

Here's how it works:

  1. Estimate Your Tax Bill: After you submit your tax return, HMRC estimates how much tax you'll owe for the next tax year.
  2. Split Payments: They divide this estimated amount into two, and you make two equal Payments on Account. The first one is due by January 31, and the second one is due by July 31.
  3. Adjustment Later: When you complete your tax return for the current year, you may find that your actual tax bill is different from the estimate. If you've paid too much

Payments on Account help you manage your tax payments throughout the year, but it's essential to keep track of your income and expenses to avoid surprises when settling your final tax bill.

Payments on account include Class 4 National Insurance Contributions where applicable, but do not include student loan repayments or Capital Gains Tax and you’ll pay those in your ‘balancing payment’.

Paying your taxes can seem complicated, particularly if you're new to filing your self assessment tax returns. There are numerous elements you need to understand and stay on top of, and one of these is the payments on account.

Payments on account are a common practice in various business transactions, particularly in situations where the seller requires payment upfront, or the buyer wants to secure the goods or services in advance. So, what is it, exactly? The answer is quite straightforward: A payment on account is an advance payment made by individuals or businesses toward their future tax liabilities.

Tax authorities may require taxpayers to make these interim payments based on their estimated income or profits. The purpose is to ensure regular and timely tax payments throughout the year, rather than a lump sum payment at the end.

Payments on account are advance payments for your self assessment tax bill that are spread out across the year. When you're self-employed or have income that isn't taxed through your pay, rather than paying your entire tax bill in one lump sum, HMRC requires you to make two separate payments on account towards your upcoming tax liability. These payments are typically due on January 31st and July 31st, each covering half of your previous year's tax bill.

Here's how it works:

  1. Estimate Your Tax Bill: After you submit your tax return, HMRC estimates how much tax you'll owe for the next tax year.
  2. Split Payments: They divide this estimated amount into two, and you make two equal Payments on Account. The first one is due by January 31, and the second one is due by July 31.
  3. Adjustment Later: When you complete your tax return for the current year, you may find that your actual tax bill is different from the estimate. If you've paid too much

Payments on Account help you manage your tax payments throughout the year, but it's essential to keep track of your income and expenses to avoid surprises when settling your final tax bill.

Payments on account include Class 4 National Insurance Contributions where applicable, but do not include student loan repayments or Capital Gains Tax and you’ll pay those in your ‘balancing payment’.

How Do Payments on Account Work?

Each payment is half of your previous year's tax bill. The payment on 31st January is the first advance payment you'll make for the current financial year, and the remaining half will be paid off on 31st July.

This can be confusing, so we've included an example below to explain how payments on account works: 

John is a self-employed repairman. For his first year of business (2020/21), he is required to pay a tax bill of £2,000 in taxes to HMRC by 31st January 2022. He also needs to make payments on account for 2021/22. These are due on 31st January 2022 and 31st July 2022, and each instalment amounts to £1,000 (half of John's previous tax bill of £2,000).  

This means that on 31st January 2022, John is required to pay a total of £3,000.

In filing his tax return for 2021/22, John discovers that his tax for the year is £2,500. As he has already paid £2,000, the amount that is due on his tax bill is £500. This is due on 31st January 2023, as is known as the balancing payment

John has to make payments on account for the 2022/23 tax year. The instalments are due on 31st January 2023 and 31st July 2023, and each tax bill payment amounts to £1,250 (half of John's previous tax bill of £2,500).

Self Assessment Letter from HMRC

Do I Need to Make Payments on Account?

You're required to make payments on account if:

  • Your last Self Assessment tax bill amounts to more than £1,000
  • You do not pay tax at source on more than 80% of your income

Balancing Payment

The balancing payment is the difference between the total tax liability for the year and the sum of the Payments on Account you've already made. If you've paid more than what you owe, you may be eligible for a refund. If you haven't paid enough, you'll need to make an additional payment.

The balancing payment, therefore, ensures that your tax liability for the year is accurately reflected and settled once all your financial information is known. It's a way for the tax system to adjust for any discrepancies between the estimated and actual tax obligations.

When are Payments on Account Due?

Payments on account are due on 31st January during the tax year, and 31st July soon after the tax year ends. For example, on January 31, 2024, and July 31, 2024, you might need to make payments on account for the upcoming tax year (2023/24) even though the tax return is due on January 31, 2025. Any excess payment or difference will be refunded by HMRC through cheque, bank transfer, or deduction from the next tax bill.

How Do I Make Payments on Account?

If you're submitting your Self Assessment online, you can make your payment on account at the same time.

If you're submitting your self assessment tax return on paper, you'll receive a paper bill and Bank Giro form that you can use to make your payment. 

There are various payment methods available; ensure you allow sufficient time for the payment to be processed before the deadline. The table below shows how long you must pay using each method to avoid late payment penalties:

Same or next day 3 working days 5 working days
Debit or corporate credit card online
Cheque through the post Direct debit -5 working days for the first time set up of Direct Debit
Bank transfer (online or mobile banking) Direct debit -3 days the following time you pay using the exact bank details.  
Bank or building society (if you receive paper HMRC statements or a paying-in slip) Bacs  
CHAPS    

Penalty for Late Payments on Account

According to HMRC, "the first late payment penalty is 5% of any tax unpaid after 30 days". 

"Where a balancing payment or payment on account is still unpaid more than 30 days from the due date for that year's balancing payment, a late payment penalty automatically arises equal to 5% of the tax unpaid at that date."

How to Reduce Your Payments on Account?

Your payments on account are based on your previous tax bill, as it is assumed that you'll be earning the same income—and as such, be paying a similar tax and get the same tax deducted in the ensuing tax year. 

Yet, as a self-employed person, it isn't unusual for your income to fluctuate from year to year. Thus, your self assessment tax return for this year might be considerably different from the previous year's tax bill.

If you think that your earnings will be lower than the previous tax year, you can make an application to have your self assessment payment on account reduced.

To reduce your payments on account online:

  • Sign in to your online account.
  • View your latest Self Assessment return
  • Select ‘Reduce payments on account’

To reduce your payments on account by post:

Submit Form SA303 to your tax office

If you overpay or underpay:

If you overpay, HMRC will send you a refund.

If you underpay, HMRC may charge interest and impose penalties for underpayments, so it's best to consult accountants for self-employed before you apply to reduce your payments on account.

Self Assessment checklist

Payments on Account Best Practices

Check your payments on account well in advance of any deadlines:

Conducting regular checks ahead of deadlines will leave you with plenty of time to contact HMRC, in the event that there are aspects you need to clarify.

You can easily do a check online-just sign into your Government Gateway account, and select the option to view your latest Self Assessment return.

This will show payments on accounts that you've made, along with payments you need to make for your next tax bill. 

Get into the habit of saving for your taxes:

If you're newly self-employed, you'll need to get into the habit of setting money aside for your tax bill.

Unsure about how much you need to save? You can use HMRC's ready reckoner. It's a tool that calculates how much you need to set aside for your Self Assessment tax bill, based on your estimated weekly or monthly profit.

Let GoForma Take the Hassle Out of Your Self Assessment Tax Return

We simplify your Self Assessment Tax return at GoForma. With our team of experienced accountants for self-employed, we handle your financial matters, providing a stress-free experience. Check out our one-off Self assessment tax return service for more details.

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