Payments on Account

Payments on account are advance payments towards your personal income tax bill. In general, if you are self-employed or receive other means of income that needs to be declared via a self-assessment tax return, you’re required to file and fully pay the tax due to HMRC by 31 January each year following the year end. This could mean that you potentially face a large tax bill that needs paying off in one lump sum. To avoid this, payments on account make it possible for you to split your tax bill into two payments throughout the year.

Why payment on account is taken

HMRC uses the payments on account system to make tax payments overall more efficient. By allowing you to spread the cost of your tax bill throughout the year, it should ease the cashflow burden and make it easier for you to be able to pay the entire bill by the deadline. For HMRC there is the benefit that they’ll receive a financial boost halfway through the year allowing the government to use the funds for public spending.

Using payments on account also means you won’t be at risk of falling into arrears on your tax payment. It prevents you from the endless cycle of having to save in the current year just to be able to pay off the last year. From HMRC’s perspective, advance payments reduce the possibility of tax avoidance and ensures people are not benefitting from large amounts of tax withheld until the next tax deadline.

Who has to use payments on account?

Not everyone who completes a self-assessment tax return will be required to pay on account. If 80% or more of your income is taxed at source then you will be exempt from the payments on account system. However, if less than 80% of your income is taxed at source and your personal income tax bill is higher than £1,000 then you will be automatically required to pay on account.

How payments on account works

Although payments on account is not a particularly complicated concept, it is notorious for catching people out, especially those who are completing their personal tax return for the first time. You will only enter the payments on account system where you are not exempt from the above conditions, and only after you have submitted your first tax return. However, from the moment you submit your first tax return, you are automatically required to settle your first payment on account by midnight of 31 January. In practice this means that you may have already paid your entire tax bill for your first year but are now also expected to pay half in advance for your next tax return.

The second payment on account is the other half of your predicted tax bill and this payment is due by 31 July. After this, if there is any amount still outstanding, this will need to be paid as the ‘balancing payment’ by the following 31 January as well as the next payment on account. If you have paid too much tax for the year, then you will be eligible to receive a rebate or you could put this amount towards reducing the next payment on account.

How payments on account are calculated

How much you have to pay on account is determined by your last self-assessment tax return bill (or first if it is the first time you are completing a self-assessment tax return). HMRC will expect you to pay the same amount for the following year, so 50% of your most recent tax return is due to be paid by 31 January and another 50% is to be paid by 31 July.

For example:

• Your total tax bill for the 2021/22 tax year was £10,000.
• This full payment would have need to be settled by 31 January 2023.
• By 31 January 2023 you will also have had to pay £5,000 towards your 2022/23 tax bill as the first payment on account
• By 31 July 2023 you need to pay the second payment on account of £5,000
• If your tax bill for 2022/23 is the same as the previous year and is also £10,000 then by 31 January 2024 you will only need to make your next payment on account of £5,000
• If you earned more for the 2022/23 tax year and your total bill is £12,000 you will need to pay the balancing payment of £2,000 by 31 January 2024, plus £6,000 as the first payment on account for the 2023/24 tax year followed by a further £6,000 for the second payment on account by 31 July 2024.
• If your tax bill is lower for the 2022/23 tax year, then you will receive a refund in 2024.

Do I have to pay HMRC payments on account?

Although the payments on account system is intended to help taxpayers pay their bill easier, due to the deadlines, that may not always be the case and it can be a challenge for some to pay in advance. In most cases, it’s not possible to opt-out of payments on account however there are some exemptions:

• You are automatically exempt if over 80% of your income is taxed at source
• You are automatically exempt if less than 80% of your income is taxed at source but your personal tax bill is less than £1,000
• You can request to have your personal tax deducted through your PAYE tax code where your personal tax bill is less than £3,000

Can I reduce my payments on account?

Whilst it is possible to reduce the amount you have to pay on account, this is only recommended where you know your personal tax liability will be less this year than the previous year (we would advise you to speak to your accountant first before doing this). It is important to understand that reducing your payment on account will not reduce your overall tax bill. Should you underestimate your tax bill for the year, not only will you have to pay the remainder but HMRC will charge you interest on the outstanding amount.

How to reduce payments on account

If you are sure you would like to reduce the amount you need to pay on account, you can use one of two methods:

• You can log into your online Government Gateway account, select the option to view your latest self-assessment tax return and then select ‘reduce payments on account’. This is by far the simplest way.
• Alternatively, you can also apply by post by completing the SA303 form and sending it to HMRC

How to make payments

There are a number of ways you can settle your self-assessment tax return bill but be mindful of how long they may take to transfer your funds across to HMRC, as missing the deadlines will result in penalties. You should also be aware that you can no longer pay at the post office, but the following methods are still available:

• Online or telephone banking
• CHAPS
• Pay online with a debit or corporate credit card (a non-refundable fee is charged if you pay by corporate credit card and you cannot pay using a personal credit card)
• Use a paying-in slip from HMRC to pay at a bank or building society (this is only available to those who still receive paper statements from HMRC)
• Bacs
• Set up a direct debit with HMRC so that it is automatically taken care of for you
• By cheque through the post to HMRC

How to check your payments

Being able to have access to an overview of your tax liability is always useful. You are able to regularly check the status of your tax affairs through your personal Government Gateway account. Once you have logged in, you’ll be able to view your last self-assessment tax return. Select the option to view and you’ll also see more options to view statements which is where you’ll be able to see any payments on account you’ve already made, as well as the payments you need to make towards your next bill if applicable.

More on Self-Assessment Tax Return

If you need help completing your self-assessment tax return, as well as find ways to reduce your overall tax bill, please see our Self-Assessment Tax Return service page. Or if you’re ready to hire a new accountant, please get in touch by calling or through the online form below.