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

December 20, 2021
January 31st is a busy day for the self-employed. Not only is this the deadline for submitting your Self Assessment tax return, but it's also the due date for your first payment on account.

In 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?

Payments on account affect sole traders paying Income Tax and limited company directors who pay their taxes through Self Assessment. This includes Class 4 National Insurance contributions when applicable, but does not cover student loans or capital gains tax — these are paid as part of your 'balancing payment', which we'll cover later on.

What does payment on account mean?

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.
We would suggest ensuring you keep plenty of money aside if you are filing a Self Assessment for the first time. With Ember, you'll know how much you owe at any given point, and can budget accordingly.

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.
Balancing payments are used to pay off the outstanding amount of your tax bill, and are due on 31st January alongside the first payment on account for the following tax year. Failure to make this payment by then will lead to interest payments on the outstanding amount, so be sure to get your balancing payment sent off early.

When do I need to pay my tax bill?

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:
Your bill for the 2019 to 2020 tax year is £3,000. You made 2 payments on account last year of £900 each (£1,800 in total).

The total tax to pay by midnight on 31 January 2021 is £2,700. This includes:

Your ‘balancing payment’ of £1,200 for the 2019 to 2020 tax year (£3,000 minus £1,800)

The first payment on account of £1,500 (half your 2019 to 2020 tax bill) towards your 2020 to 2021 tax bill

You then make a second payment on account of £1,500 on 31 July 2021.

If your tax bill for the 2020 to 2021 tax year is more than £3,000 (the total of your 2 payments on account), you’ll need to make a ‘balancing payment’ by 31 January 2022.

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?

To make paying your tax bill as painless as possible, we recommend getting into some good habits that'll make preparing, filing and paying your Self Assessment tax return as seamless as possible. With Ember on hand, not only do we make it possible for these practices to become second nature, but our in-house expert accountants are always on hand to help out if need be. Our personal tax report also provides a tax estimator for your Self Assessment, which includes a calculation for payments on account.

Keep careful records throughout the year

As mentioned above, the information you input into your Self Assessment tax return determines the total amount owed in your tax bill, so to save yourself the stress of scrambling through documents at the last minute, we recommend keeping a steady record of your cash inflows and outflows throughout the year.

At Ember, we have all the tools you need to collect and keep this information neatly organised in our app. By automating everything from invoicing to expense management, you'll have no trouble finding everything you need to file your Self Assessment in just a few clicks.

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?

Whether you've missed the payment deadline or know you won't be able to pay on time, the best course of action in either scenario is to get in touch with HMRC as soon as possible.

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
If the above does not apply to you, you can call the Self Assessment helpline for further advice, or get in touch with one of our expert accountants here at Ember.