When you become self-employed as a sole trader, the way you pay tax changes compared to the way you pay it as an employee.
Instead of paying as you receive income, through PAYE and your tax code, you’ll need to calculate and pay an annual bill to HMRC through a self-assessment tax return.
For many business owners, paying their entire bill for the year would be a major expense to deal with in one go, and a big dent in their cash flow. That’s where self assessment payments on account come in.
If you’re encountering payments on account for the first time, they can be hard to wrap your head around. To make things easier, we’ve explained the main points you need to know about what payments on account are, when you need to pay them, and how to apply to HMRC to reduce them.
What is a self assessment payment on account?
A payment on account is an advance payment towards your self-assessment tax bill.
These are made twice a year by self-employed people, with deadlines on 31 January and 31 July, to help spread the cost of tax into more manageable chunks.
Each payment is half of your tax bill for the previous year – essentially, HMRC is predicting how much you might owe for the upcoming tax year.
When your actual tax bill comes through for the year, you might also be required to make a ‘balancing payment’ by 31 January to make it up to the right amount – or, if it turns out you’ve overpaid, you might receive a refund from HMRC.
This is best explained through an example. Let’s say you’ve just completed your self-assessment return for the tax year that ran from 6 April 2020 to 5 April 2021, and received a tax bill of £2,000 which you’ve now paid off.
For the next tax year – the one running from 6 April 2021 to 5 April 2022 – this would mean you need to make a payment on account of £1,000 in January 2022, then another £1,000 in July 2022.
Then, when you come to fill out your self-assessment return for the 2021/22 tax year, you might find your tax bill is higher than the year before. For the sake of the example, let’s say it’s £2,700. This would mean a balancing payment of £700 is due by 31 January 2023.
One important detail to note is that payments on account do not include any capital gains tax you owe, or any student loan payments you owe if you’re self-employed. You’ll instead pay these in your balancing payment.
Is payment of advance tax compulsory?
Payments on account are compulsory for most self-employed people who owe tax over a certain threshold.
If you don’t have a large tax bill, however, or you’ve already paid most of it through your tax code, you might not be required to pay your tax in advance.
You have to make two payments on account every year unless:
- your last self-assessment tax bill was less than £1,000
- you’ve already paid more than 80% of all the tax you owe.
How to reduce your self assessment payments on account
If you expect your next tax bill to be lower than the last year, you can apply to HMRC either online or by post to reduce your payments on account.
This is a helpful option for business owners whose income tends to fluctuate from one year to the next, so you don’t have to go through the trouble of paying a large bill that you’ll need refunded anyway.
To reduce your payments on account online, log in to your online HMRC account and view your latest self-assessment return, then select ‘reduce payments on account’. Alternatively, you can send form SA303 to your tax office.
Help with paying your self assessment bill
If you’re struggling to pay your self assessment bill, or you simply didn’t know you would need to make a payment on account, you can contact the HMRC and speak to their time to pay team. They will be able to arrange a more affordable repayment plan to fit in with your needs.
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