If you’re self-employed and don’t use the Pay As You Earn (PAYE) system, you might need to make payments on account to HMRC instead. Keep reading to learn more about how this system works and whether or not you’re liable.
What is a Self Assessment payment on account?
Payments on account offer self-employed workers a way to spread out tax payments throughout the year. The main goal of this system is to prevent you from falling into high debt with HMRC, taking advance payments to ease the burden of paying all at once. Instead of paying a single tax bill on 31 January, it’s split into two instalments based on calculations from the previous tax year.
For the newly self-employed, the first tax bill will be higher because it will include one of these forwarding payments for next year, as well as the current year’s tax liability.
For example, imagine that you registered as a sole trader in June 2019 and you owe £1500 in income tax for the 2019-2020 tax year. You’d need to pay the £1500 by the filing deadline of 31 January 2021, along with your first payment on account for the 2020-2021 tax year. This would add £750 to your 31 January bill for a total of £2250. You would then pay an additional £750 on 31 July 2021. The idea is that this would cover the full tax burden for 2020-2021 in advance.
Of course, self-employed income often fluctuates, as do tax laws, so it’s likely you wouldn’t owe exactly £1500 in 2020-2021. After filing your 2020-2021 Self Assessment, you’d find out if you need to make any additional balancing payments, or receive a refund if you’ve overpaid. Payments on account are based on a prediction of future income, based on past income.
Income tax payment on account exemptions
You won’t always need to make payments on account. If over 80% of your income is already taxed through PAYE, the system won’t apply. You also don’t need to make an income tax payment on account if your Self Assessment tax bill is less than £1000 for the year.
How to pay your HMRC payment on account
Making a payment is simple. To get started, you’ll need your Unique Taxpayer Reference (UTR) number followed by the letter ‘K’. This serves as your payment reference for HMRC, which you’ll need no matter which of the following options you choose.
Pay online with a bank transfer or Direct Debit payment
Pay online with a corporate credit card or debit card
If you receive paper statements, you can pay in person at your bank or building society
Pay through the post by cheque
Keep deadlines in mind, as HMRC charges penalties for late payments. Some methods, such as Direct Debit payments or paper cheques, take several business days to clear in your account.
How to keep track of your HMRC payment on account
As with all tax matters, it’s important to keep track of your payments. You can view your Self Assessment return at any time by signing into the HMRC website using your Government Gateway ID. Click on ‘View statements’ to see payments on account that have already been paid, along with any outstanding bills.
How to reduce payments on account
It’s not uncommon for your income to fluctuate from one year to the next. HMRC accounts for this by allowing you to reduce payments on account if anticipated income falls from one tax year to the next. Simply log into the HMRC website and click on the ‘reduce payments on account’ link, or submit form SA303 to the tax office.
Keep in mind that this process should only be used as intended. Some sole traders will reduce payments on account when it’s difficult to pay the full tax bill up front, but this can backfire. If you end up underpaying your tax bill due to reduced payments on account, HMRC will ask for the full amount with interest. This can increase your overall tax burden. On the other hand, if you overpay through payments on account, you’ll get a refund at the end of the tax year.
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