Understanding Payments on Account: A Guide for Sole Traders and Self-Employed Individuals

Are you a sole trader or self-employed? Are you trying to navigate the complexities of Payments on Account? If so, rest assured, you’re not alone!

Clients often ask us about Payments on Account. This happens when their tax bill is over £1,000. To help you understand the system better, we have simplified the explanation.

What are ‘Payments on Account’?

‘Payments on account’ are advance payments towards your self-assessment tax bill. Typically, you must make them twice a year unless you meet certain conditions. We have listed these conditions below:

  • Your self-assessment tax bill was less than £1,000.

  • You have already paid over 80% of your tax from last year. You did this through means such as your tax code or bank deductions for savings interest.

HMRC estimates tax owed based on the previous year’s bill and dividing it into two payments. Here are the important dates for your convenience:

  • Midnight on 31st January – Includes tax owed from the previous year and a payment on account for the upcoming tax year.

  • Midnight on 31st July – This is the second payment on account for the upcoming tax year.

If you owe any taxes after making payments on account, you must pay a ‘balancing payment’ by midnight on January 31st of the following year.

Below is an example of how the ‘balancing payment’ works:

–        Tax Year 2021/22:

Estimated tax bill: £2,000. Two payments on account in January and July, each amounting to £1,000.

–        January 31, 2023:

Total payments on account = £2,000. Actual tax liability discovered = £2,500.

–        Balancing Payment Calculation: 

To find the balancing payment, subtract the £2,000 in total payments from the £2,500 tax owed. The result is a balancing payment of £500.

–        Ensure that the balancing payment of £500 is paid by midnight on January 31, 2023.

This example shows how the ‘balancing payment’ covers your full tax bill. It does this by fixing differences between the estimated and actual tax bills.

Important note: Payments on account don’t cover capital gains or self-employed student loan amounts. Those are settled in your ‘balancing payment.”

To review your payments on account:

  1. Log in to your HMRC account
  2. Access your latest Self-assessment return
  3. View statements.

For further guidance, please visit the HMRC website or contact our knowledgeable staff.

SALF303 – Payment of tax: payments on account – HMRC internal manual – GOV.UK (www.gov.uk)