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Payments on account: Paying your taxes as a sole trader or limited company

December 20, 2021In this article we'll be outlining everything you need to know about payments on account, including what they are, when to pay them, and how to best be prepared for your first payment on account as a Self Assessment taxpayer.

What are payments on account?

In short, payments on account are advance payments on your tax bill for the next year, which HMRC estimates to be the same as the bill for the present tax year. This is paid in two instalments, with each payment accounting for 50% of your tax bill each time.

What does payment on account mean?

Put simply, a payment on account is a payment contributing towards part of a bill, and is typically paid in instalments. By breaking your tax bill down into separate instalments, HMRC aims to make paying your tax bill more manageable. The reality, of course, is that HMRC wants to receive your tax earlier.There is, however, a catch, especially for those completing a Self Assessment for the first time. For those unaware of what payments on account are, they may have only set aside enough for the initial tax bill, only to get a shock when presented with a bill that states an extra 50% more than they were expecting to pay in January and another 50% in July.This will eventually balance out over time, as although you'll still be making payments on account, your tax for the following year will be reduced by the payments on account paid towards that tax year. The downside of this, however, is that you'll be forking out next year's tax early — which means you'll be missing the cash you could have used elsewhere.

How is my total tax bill calculated?

The amount you pay in tax is worked out through the information you submit in your Self Assessment tax return. This can be sole trade profits, salary and dividends received from your limited company or other external income.Once received, HMRC will confirm the tax due for the tax year in question as well as confirming if payments on account will be payable towards the next tax year.

What are balancing payments?

When making payments on account, you're making contributions towards a tax bill that doesn't quite exist yet. That means that when you submit your Self Assessment tax return for the year you're paying for, you might find that both of your payments on account aren't enough to cover the total bill. This is where balancing payments come in.

When do I need to pay my tax bill?

As mentioned above, your tax bill is paid in two instalments, with the first due on 31st January and the second on 31st July. The first instalment is the same day as the deadline for your Self Assessment tax return, so it's good to make sure you're prepared not only to file your return, but to have the money ready for your first payment on account instalment.As mentioned above, the rules differ for those paying their Self Assessment tax bill for the first time. After submitting their tax return, they'll need to pay the total amount for their first year of trading, alongside the first half of their tax bill for the following year which is estimated to be the same — coming in at 150% of this year's tax.

Payment on account example

Since this can be quite difficult to visualise at first, an example breaking down the different dates payments on account should help clarify both the amount due at each instalment and what it is you're paying off each time. Gov.uk provides this example:

How to check your payments on account

You can find both the payments you've already made and the payments you'll need to make towards your next tax bill on your Government Gateway account. To access this information:

Sign into your online account.Select the option to view your latest Self Assessment return.Select 'View statements.'

When won't I need to make a payment on account?

Under certain circumstances, you might find that you don't have to make payments on account. This is the case if:

Your last Self Assessment tax bill was less than £1,000You've already paid more than 80% of all the tax you owe, for example through your tax code or because your bank has already deducted interest on your savings

How do I make payments on account?

Once you're ready to pay your Self Assessment payment, you'll need to grab your 11-character payment reference — the Unique Taxpayer Reference (UTR) you received after registering for Self Assessment followed by the letter 'K' — and pay through one of the following methods:

Online using a debit card or corporate credit cardThrough an online or telephone bank transfer using Faster Payments, CHAPS or BacsAt your bank or building societyBy cheque through post

Regardless how you choose to pay your tax bill, be sure to take into account how long the processing period for your payment may be. For instance, it takes 5 working days for a direct debit to be set up and ready to go, so be sure you have everything set up long before the deadline.

How can I be best prepared for my tax bill?

Keep careful records throughout the year

File your Self Assessment as early as you can

The earlier you file, the earlier you can find out exactly how much you owe and therefore plan accordingly. Rather than rushing to scrape together as many pennies as you can before the deadline, getting your Self Assessment tax return in early gives you more than enough time to set aside the cash you need to pay your first instalment.

Set up your payment method

As mentioned above, as soon as you've settled on how you plan to pay your tax bill, be sure to have everything set up long before the deadline. Considering the length of time it can take for your payment to be processed alongside any problems you might face will give you enough time to resolve any issues before the deadline.

Set aside a portion of your income regularly

As with stringent record keeping, it's good to get into the habit setting aside some cash specifically for your Self Assessment tax bill. Consider stashing away a percentage of your income or a setting aside a fixed figure each month to make sure you have enough to cover the next payment on account you need to make.

Can I reduce my payments on account?

While your payments on account are estimated to be the same year-on-year, in real life this is rarely the case. If you're expecting your taxable income to be less than the previous year, you can apply to reduce your payments on account. You can do this either by sending an SA303 form to your tax office by post, or via your online account, or your accountant can do this on your behalf.Reducing your payments on account is not without risks, however. If you overpay your tax bill, HMRC will simply send you a refund. However, if you overpay, you will be charged interest on the outstanding amount. If you're considering reducing your payments on account, we recommend getting in touch with an Ember accountant beforehand.

I can't afford my next payment on account. What can I do?

Through the Time to Pay arrangement, you can pay your tax bill in instalments through your Government Gateway account if you:

Have filed your latest tax returnOwe less than £30,000Are within 60 days of the payment deadlinePlan to pay your debt off within the next 12 months or less