Payment on account, what does it mean and how does it work?

‘Payments on account’ as they are known are the advance payments you’ll need to make towards your self assessment tax bill if you’re self-employed.

A main factor to understand is that these payments are for the work you expect to undertake in the upcoming year, not for work you have already undertaken.

There are two instalments, each calculated as half of the previous year’s tax bill.

The two deadlines for paying your self-assessment tax are midnight on January 31st for the first payment and midnight on July 31st for the second payment.

HMRC estimate how much tax you owe for the upcoming year based on your previous year’s tax bill. Payments on account are designed to spread the payment process throughout the year to help small and medium business owners with cash flow, allowing you to budget for this and ensure you have saved money back for the payments.

Payment on account Example:

If for example your bill for the 2022 to 2023 tax year is £3,000. HMRC will have identified you make 2 payments of £900 each (£1,800 in total) on account towards this bill in 2023.

The total tax to pay by midnight on 31 January 2024 therefore is £2,700.

This includes:

• your ‘balancing payment’ of £1,200 for the 2022 to 2023 tax year (£3,000 minus £1,800)
• the first payment on account of £1,500 (half your 2022 to 2023 tax bill) towards your 2023 to 2024 tax bill

You then make a second payment on account of £1,500 on 31 July 2024.

If your tax bill for the 2023 to 2024 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 2025.

What if you have paid too much

Being self-employed can mean you have a variable income, and you might end up paying more tax than you owe if your work has decreased during the upcoming year, you have made less profit or you have invested in capital assets. If this is the case, you’ll be entitled to claim a payment on account refund.

HMRC will decide if you’ve paid too much and are eligible for a refund when they receive your tax return. If this is the case, they will automatically refund the amount into your account, assuming you have previously provided them with your bank details.

Can I reduce payments on account?

If you believe your tax bill is going to be lower than last year, you can ask HM Revenue and Customs (HMRC) to reduce your payments on account. You can do this either online, by post or through your accountant.

Looking for some advice or help?

If you are looking for a local, friendly, down-to-earth firm of accountants, or perhaps just looking to change your existing accountant, please drop us an email or give us a call to chat about your business, your accounting requirements and your budget. And we are more than happy to meet up with you for a free, no-obligation initial chat to get the ball rolling.

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