Payment on account: A guide for self-employed

Payment on account is advance payment self-employed taxpayers make towards their expected tax bill for the next tax year. In this article, we cover who these payments apply to, how how to calculate these payments, as well as pitfalls to be aware of.​

Payment on account is a payment made in advance towards next year’s expected tax bill, helping the taxpayer spread the cost of the tax bill over the year. ​

The self-assessment payment on account due dates for the 2022/23 tax year (which ends on the 5th of April 2023) are the 31st of January 2023 and the 31st of July 2023. The balancing payment is due on the 31st of January 2024 (the same date tax returns are due for filing).​

Payments on account are payable by all sole traders and self-employed individuals, in respect of their income tax (including your Class 4 national insurance contributions), unless the following apply:​

For regular PAYE employees, employers are responsible for sending their taxes to HMRC.​​

As a sole trader, there are two drawbacks when simply paying the full amount on your tax return by the payment due date:​

With payments on account, you don’t need to pay tax every month, nor do you need to come up with a lump sum in January. Instead, you pay your tax in two instalments, and any additional tax will be due as a balancing payment along with your tax return on the 31st of January following the end of the tax year.​

If you end up paying too much, a refund will be assessed by HMRC when you file your tax return.​​

Each payment is half your previous year’s tax bill. ​

If your tax bill for 2021/22 was £6,400, you will need to pay £3,200 on the 31st of January 2023, and £3,200 on the 31st of July 2023. This goes towards your 2022/23 tax bill. ​

In this scenario, if you prepare your tax return for 2022/23 and your tax bill turns out to be £7,000, you will need to pay the additional £600 in January 2024. ​

If, on the other hand, your tax bill for 2022/23 ended up only being £6,000, HMRC would issue a refund for the £400 overpayment when you file your tax return. ​

Your tax liability won’t always stay the same - some years, it could go down (due to your business profits or other income), or the tax relief you're entitled to could go up.​

If this happens, you can ask for your payments on account to be reduced. This can be done via HMRC’s online service, or by filling out a postal form on-screen, printing it, and sending it in the post. To use the online service you'll need to have a Government Gateway user ID and password. You can create a user ID while using the service.​

Find out more about reducing your payments on account here.​

If the 2021/22 tax year is the first year you’re operating, you won’t have paid taxes for a while. It can be daunting to a tax bill for 2021/22, followed by another 50% of this on the 31st of January 2023. ​

Assuming you have a March year-end and you’re not VAT registered, let’s see what your first year in business will look like:​​

1. You started your business in July 2021. ​

2. The tax year ends on 5 April 2022 - you haven’t paid any tax for this whole period. ​

3. Your tax return for 2021/22 is due on the 31st of January 2023. ​

18 months after you first started your business, and you suddenly need to pay 100% of your tax bill for 2021/22, as well as an additional 50% of the value of your 2021/22 tax bill towards 2022/23.​

At Beany, we’re here to help you handle your self-assessment payment on account by providing you with the expected amounts you’ll need to pay and the due dates. To have enough time to plan for tax payments, it’s important to get your financial information to us as quickly as possible.​

When we complete your tax return at the end of the financial year, we include details of your self-assessment payment on account. A final refund or tax bill will be calculated after considering the instalments. If you want to learn more about how this is done, get in touch with us!​​

We have a few blogs on self-employed if you'd like to know more on this topic:​

Pension for self-employed: what you need to know​

Being a sole trader: 8 frequently asked questions​

Being a sole trader: the advantages and disadvantages​

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We have a dedicated team of certified accountants and a support team to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today.​