If you are a sole trader and your Self Assessment bill suddenly looks much bigger than expected, payments on account are usually the reason. They are not an extra tax. They are advance payments towards your next tax bill, and understanding them helps you plan your cash flow.
What are payments on account?
Payments on account are two advance instalments towards the tax bill for the current tax year. According to GOV.UK, they are due by midnight on 31 January and 31 July. Any balancing payment is due by midnight on 31 January of the following year.
How each payment is worked out
GOV.UK explains that each payment is usually half of the tax you owed for the previous year. HMRC bases the figure on last year's bill, not on what you expect to earn this year. If your income is higher than that estimate, you may owe a balancing payment, which is your total tax minus the payments on account you have already made.
When they apply
You do not have to make payments on account if either of these applies:
- the amount of tax you owed last year was less than £1,000; or
- last year you paid more than 80% of the tax you owed outside of Self Assessment.
A short worked example
The figures below are invented purely to illustrate the mechanics.
- Your Self Assessment tax bill for last year was £6,000.
- Each payment on account is usually half of that: £3,000 due on 31 January and £3,000 due on 31 July.
- When you file this year's return, your actual tax bill turns out to be £7,000.
- You have already paid £6,000 on account, so the balancing payment is £1,000, due by 31 January of the following year.
If your bill had instead come out at £5,000, you would have paid more than you needed to.
Reducing your payments on account
If you expect a lower tax bill than last year, you can ask HMRC to lower your payments on account. You can do this online by selecting "Reduce payments on account", or by post using form SA303. You must state the amount you expect to pay. Take care: GOV.UK notes that if you reduce your payments and your bill turns out higher than expected, you will pay interest on the shortfall.
What to do
- Check last year's Self Assessment bill to see whether it was £1,000 or more.
- Put aside money each month so the 31 January and 31 July dates do not catch you out.
- Review your profits partway through the year. If they have clearly fallen, consider asking HMRC to reduce your payments.
- Be cautious about reducing them. Only do so if you have a realistic estimate.
- Keep your records up to date so your return and any balancing payment are accurate.
General information only, not tax advice. Your circumstances may differ. If you are unsure, speak to a qualified accountant or contact HMRC.
Check the current rules on GOV.UK before you pay or make any changes, as dates and thresholds can be updated.