Payments on Account Explained with a Simple Example

If you are a sole trader completing a Self Assessment tax return in the UK, you might come across the term payments on account. These are advance payments towards your next tax bill, designed to help spread the cost of your Income Tax and Class 4 National Insurance contributions.

What Are Payments on Account?

Payments on account are usually required if your last Self Assessment tax bill was more than £1,000 and less than 80% of your tax was collected at source (for example, through PAYE). Instead of paying your entire tax bill in one go the following January, HM Revenue and Customs (HMRC) asks you to make two payments on account towards the next year’s tax.

How Payments on Account Work

Each payment on account is half of your previous year’s tax bill (excluding any Capital Gains Tax and student loan repayments). The payments are due in two instalments:

• First payment: by 31 January in the tax year
• Second payment: by 31 July following the end of the tax year

After these payments, when you file your next tax return, HMRC will calculate your actual tax liability. If you owe more than the payments on account you’ve made, you pay the difference by the following 31 January. If you’ve paid too much, you’ll get a refund or the overpayment can be offset against your next payments.

A Simple Example

Suppose in the tax year 2022 to 2023, your total tax bill (Income Tax and Class 4 National Insurance) was £2,000. You did not have tax deducted at source, so you need to make payments on account for 2023 to 2024.

1. By 31 January 2024, you pay the first payment on account of £1,000 (half of £2,000).
2. By 31 July 2024, you pay the second payment on account of £1,000.
3. When you submit your 2023 to 2024 tax return by 31 January 2025, HMRC calculates your actual tax bill for that year. If it is £2,200, you will pay the extra £200 by 31 January 2025.
4. If your tax bill is only £1,800, HMRC will refund you £200 or adjust the next payments accordingly.

Exceptions and Adjustments

If you expect your income to be lower in the current tax year, you can ask HMRC to reduce your payments on account. However, if you reduce them too much and end up owing more tax, you might have to pay interest on the shortfall.

Payments on account do not apply if your previous tax bill was £1,000 or less, or if 80% or more of your tax was collected at source, such as through PAYE.

Summary

Payments on account help you manage your tax payments by splitting your estimated tax bill into two instalments before your final tax return is due. They are based on your previous year’s bill but can be adjusted if your income changes. Always keep good records and complete your Self Assessment tax return on time to avoid penalties.

Official reference: https://www.gov.uk/self-assessment-tax-returns. Always check the latest official guidance. Related forms: Browse our form category.

Important: This article provides general information. Government rules, forms and procedures can change, and this article may not reflect the latest updates. Check current GOV.UK guidance or the relevant authority before relying on it. ITG & Co. is independent and is not affiliated with a government department.