Unlike Pay as You Earn (PAYE), payments on account are advance payments towards your Self-Assessment tax bill, however not everyone who completes a self-assessment tax return is liable.
It is calculated based on the previous year’s tax bill figure and each payment on account is 50% of the previous year’s self-assessment tax liability.
The two dates in which payment is required is 31st January (the first instalment) and 31st July (the second instalment).
Jon paid £4,000 in total for tax for the 2019/20 tax year.
To help towards his 2020/21 tax bill he would need to make a payment on account of £2,000 by 31st January 2021 and then a second payment of £2,000 by 31st July 2021.
The process of paying your payment on account requires you to have your payment reference handy (Unique Taxpayer Reference or UTR). Once you’re able to track this down, it should be a fairly straightforward procedure. The payment can be made through your online bank account, online or telephone banking, CHAPS, debit or corporate credit card online, or at your bank or building society. For official government advice on how to pay your payment on account, visit here.
If you’re unable to pay the whole tax bill by 31st July, you are likely to face interest charges on the outstanding amount. If this is the case, you should get in touch with HMRC as soon as possible to try to arrange a ‘Time-to-Pay’ agreement. You can find more information here.
Self-employment is notorious for bringing in inconsistent and fluctuating levels of income from year to year. For this reason, an application process is in place whereby self-employed individuals can apply to have their payment on account reduced. You’re eligible for this if you believe that your income for the next tax year will be lower than the previous year. The way of going about this consists of simply going onto your online HMRC account and selecting the option of ‘Reduce Payments on Account’. An additional (non-electronic) method is to mail form SA303 to your tax office.
It’s best to only do this if you really do think that your income for the next year will be reduced. If your claim is accepted and you end up actually earning more than you’d anticipated – you will have to pay back the remaining tax to HMRC.
Senior Tax Manager
FOR GENERAL INFORMATION ONLY. The information provided in this article is for general information only and does not constitute any specific advice or guidance. Whilst every care has been taken in the preparation of this article, it may contain errors and/or omissions. Always seek professional advice before taking any action. Last updated July 2021.