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What Are Payments On Account?

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Last editedJun 20212 min read

Payments on account explained

If you’re a self-employed worker who submits a self-assessment tax return every year then you need to understand the HMRC payment on account system. This is a system via which payments are made twice a year, in instalments which fall due on 31 January and 31 July.

The principle behind payments on account

The thinking behind payments on account is that it helps self-employed people to spread the cost of the tax they will have to pay in the upcoming year. The amount to be paid on each date is calculated based on the tax due for the previous tax year. This means that HMRC is predicting the future income of a self-employed person based on their past income. The system has been set up so that self-employed workers find it easier to keep control over the amount they owe, and so they don’t gain too much of an advantage from paying in arrears. 

How self-assessment differs from PAYE

People who are employed are taxed at source via the PAYE system, whereas self-employed workers pay their tax bill for the previous tax year in January of the following calendar year. That the tax due for the previous year and the first of the payments on account are both due on 31 January means that many people new to self-employment face a bill much higher than they were expecting. A self-employed person who is already struggling to make the payments due for the previous year may find themselves tipped over the edge into genuine hardship by the additional money being asked for. 

An example of payments on account

Usually the payments on account will amount to 50% of the previous tax bill. The UK government’s own website uses an example to illustrate how payments on account work in practical terms.

If the bill for the tax year 2020/21 was £3,000, and the self-employed person in question made two payments on account of £900 during the previous year, then the amount that must be paid by midnight on 31 January 2022 is £2,700. This comprises the following:

  • A “balancing payment” of £1,200 to cover the 2020/21 tax year. This is the £3,000 due, minus the payments on account totalling £1,800

  • A first payment on account of £1,500, which is half of the 2020/21 tax bill, and will go toward the 2021/22 tax bill

  • The second payment on account of £1,500 must be paid by midnight on 31 July 

If the eventual tax bill for 2021/22 comes to more than £3,000 then a balancing payment must be paid on 31 January 2022. If they apply, Class 4 National Insurance Contributions are included in payments on account, but student loan repayments and Capital Gains Tax are not.  

Exemptions from making a payment on account

A payment on account won’t have to be paid under the following circumstances:

  • If the tax bill for the previous year was less than £1,000 after PAYE

  • If 80% or more of the tax due to be paid was deducted at source through PAYE

Making your payments on account 

A payment reference must be used when making a payment on account. This is the Unique Taxpayer Reference given to every self-employed person followed by the letter K. As long as this reference number is included, a payment on account can be made in the following ways:

  • Online using a corporate credit card or debit card

  • A bank transfer (BACS) either online or via phone banking

  • Setting up a direct debit to make the payment

  • At a bank or building society using either a paper statement from HMRC or the paying-in slip provided to you

  • Sending a cheque through the post

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