HMRC Payments on Account
Payments on Account for Self Employed – Fully Explained
What is a payment on account?
Payments on account often come as a shock to self-employed people! Here is an explanation of what and why they need to be paid.
HMRC ask self-employed people to make payments on account twice a year. These payments are designed to help to spread the cost of the upcoming year’s tax. Payments on account are calculated using the previous year’s tax bill. HMRC are predicting your profit to be similar to the previous year’s profit.
Your payments on account are due in two instalments – the deadlines are 31 January and 31 July. As mentioned above, HMRC asks for these payments in order to help self-employed people stay on top of the tax they owe. Another reason is because self-employed people pay their taxes once a year, due by the 31st January after the April 5th year end – giving them 9 months grace so to speak.
Payment on Account Example
Tax Bill Bands
Tax Bill up to £4,000
Each of the two payments on account will normally be 50 per cent of your previous tax bill.
Your bill for the 2022 to 2023 tax year is £4,000. You made two payments on account last year of £1,100 each (£2,200 in total).
The total tax to pay by midnight on 31 January 2024 is £3,800. This includes:
- your ‘balancing payment’ of £1,800 for the 2022 to 2023 tax year (£4,000 minus £2,200)
- the first payment on account of £2,000 (half your 2022 to 2023 tax bill) towards your 2023 to 2024 tax bill
- you have to pay your second payment on account of £2,000 by midnight on 31 July 2024
Tax Bill More than £4,000?
If your tax bill for the 2022 to 2023 tax year is more than £4,000 (the total of your two payments on account), you’ll need to make a ‘balancing payment’ by 31 January 2024.
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
- 80 per cent or more of your tax was deducted at source through PAYE