Understanding Payments on Account for Self-Assessment

Let’s dive into something that often confuses many of us…Payments on Account. 

If you’ve ever scratched your head wondering what payments on account are and why you need to make them, you’re in the right place. Let’s break it down in simple terms.

What Are Payments on Account?

Think of Payments on Account as an advance payment towards your tax bill. HMRC (that’s Her Majesty’s Revenue and Customs) wants to make sure you’re keeping up with your taxes throughout the year, so they ask for two payments in advance. This helps spread the cost and avoids a big shock when your tax bill arrives.

Who Needs to Make Payments on Account?

If your last Self-Assessment tax bill was more than £1,000, HMRC usually asks you to make these payments. Also, if more than 80% of your tax is not deducted at source (like PAYE for employees), you’ll need to cough up.

How Much Do You Need to Pay?

Here’s the simple part. Each payment on account is half of your previous year’s tax bill. So, if you owed £2,000 last year, you’ll need to make two payments of £1,000 each.

When Do You Need to Pay?

Mark these dates on your calendar:

  1. 31st January – Your first payment on account is due.
  2. 31st July – Your second payment on account is due.

And don’t forget, your balancing payment (if you owe anything extra) is also due on 31st January of the following year.

How to Pay Your Payment on Account

When it’s time to pay your payment on account, you’ll need your payment reference. This is your Unique Taxpayer Reference (UTR) number with a ‘K’ at the end.

Here’s how you can make your Self Assessment payment on account:

  • Online: Use a debit card or corporate credit card.
  • Bank Transfer: Through online or phone banking, or set up a Direct Debit. Remember, Direct Debits take five working days the first time and three working days for subsequent payments using the same bank details.
  • In Person: Head to your bank or building society if you still get paper statements from HMRC or have a paying-in slip they sent you.
  • By Post: Send a cheque through the mail.

Make sure to leave enough time for the payment to process.

What If My Income Changes?

Life happens, and sometimes your income isn’t as predictable as we’d like. If you think your income is going to be lower this year, you can apply to reduce your payments on account. But be careful! If you reduce them too much and end up underpaying, HMRC might charge you interest on the shortfall.

Struggling to Pay?

If cash flow is tight, don’t panic. HMRC offers a Time to Pay arrangement which allows you to spread the cost over a longer period. It’s always better to contact them sooner rather than later to discuss your options.

Why Are Payments on Account Important?

Staying on top of your payments on account ensures you don’t face a massive bill come January. It’s all about managing your finances smoothly so you can focus on growing your business, taking those well-deserved holidays, and spending time with your family.

Payments on Account Example

Tony’s Story: A Self-Employed Mechanic

Tony, who’s a self-employed mechanic, had a £4,000 tax bill for the 2023 to 2024 tax year. Last year, he made two payments on account of £1,200 each, totalling £2,400.

So, what does Tony need to pay by midnight on 31 January 2025?

Here’s the Breakdown:
  • Balancing Payment: £1,600 for the 2023 to 2024 tax year (£4,000 minus the £2,400 he already paid).
  • First Payment on Account: £2,000 towards his 2024 to 2025 tax bill (this is half of his 2023 to 2024 tax bill).

Tony’s total payment by 31 January 2025 is £3,600.

Tony will also need to pay his second payment on account of £2,000 by midnight on 31 July 2025.

If Tony’s tax bill for the 2024 to 2025 tax year is more than £4,000 (the total of his two payments on account), he’ll need to make a ‘balancing payment’ to settle the bill by 31 January 2026.

A Few Important Points:

  • Payments on Account include Class 4 National Insurance Contributions where applicable.
  • They do not include student loan repayments or capital gains tax.

Who’s Exempt?

You won’t need to make a payment on account to HMRC if:

  • Your tax bill for the previous year was less than £1,000 after PAYE.
  • 80% or more of your tax was deducted at source through PAYE.

Final Thoughts

Payments on Account might seem like a hassle, but they’re there to help you manage your tax liabilities better. Keep those dates in mind, plan ahead, and you’ll sail through your Self-Assessment..

Why not check out our Bookkeeping Spreadsheet for Sole Traders? It calculates your Tax, National Insurance, and Payments on Account for you. Watch the Demo HERE.

Remember, we’re here to support you every step of the way. If you have any questions or need a bit more help with your tax affairs, don’t hesitate to reach out.

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