HMRC Payments on account: what they are & when to pay your tax bill

‘Payments on account’ are to do with paying your tax bill in the UK via HMRC (typically if you are self-employed). They are advance payments due every January and July and designed to split up your tax bill into more manageable chunks. However, as the tax bill can be one of the largest business outgoings, Payments on account often cause confusion and anxiety among business owners. This is why we’ve put together this short guide, at Sampson Fielding in Mayfair, London - we are a team of chartered accountants and business advisors and this overview is to help you take steps confidently in your business.

Introduction to Payments on account & your tax bill with HMRC

Tax season can be a perplexing time for many individuals in the UK, especially when it comes to making payments on account. To demystify this aspect of taxation, let's delve into what payments on account are and how they impact your financial responsibilities.

What are Payments on account?

HMRC Payments on account are advance payments towards your tax bill. Rather than paying your tax in one lump sum, in certain circumstances, HMRC divides your tax liability into two equal parts. The first payment is due by January 31st of the tax year, and the second by July 31st.

How are Payments on account calculated?

The calculation of payments on account is based on your previous year's tax bill. Each payment on account is typically half of the previous year's tax bill. However, if your tax liability is expected to decrease in the current tax year, you have the option to adjust your payments on account accordingly.

Who needs to make Payments on account?

Payments on account are generally applicable to individuals who meet the following criteria:

1. Self-Employed Individuals

If you're self-employed and your tax bill is over £1,000, payments on account apply.

2. Partnerships

Partnerships are also subject to payments on account if their tax bill exceeds £1,000.

3. Other income earned outside of PAYE

If you have substantial income outside of Pay As You Earn (PAYE), you may be required to make payments on account. This will apply were you paid less than 80% of the previous year’s tax you owed.

Payments on account: exceptions and adjustments 

It's important to note that certain circumstances may warrant exceptions or adjustments to payments on account:

1. Decrease in Tax Liability

If you anticipate that your tax liability for the current year will be lower than the previous year, you can apply to reduce your payments on account.

2. Payment Deferral

Individuals with PAYE income or tax deducted at source may not be required to make payments on account.

What are the consequences for not making the correct Payments on account?

Failure to make payments on account by the due dates can result in interest charges and penalties. It's crucial to stay informed about your tax obligations and proactively manage your payments to avoid unnecessary financial implications.

How do I make payments on account to HMRC?

Payments on account can be made online through the HMRC website. It's advisable to use the correct reference number to ensure that the payment is correctly attributed to your account. This is normally your UTR number with an additional “k”.

For details on different ways to pay your tax bill, see the official HMRC guidance under Further Reading below: ‘Pay your Self Assessment tax bill: Overview‘.

Anything else I need to know about Payments on account for my self assessment tax bill?

Understanding payments on account is a fundamental aspect of responsible tax management for self-employed individuals, business owners, and company directors in the UK. By staying informed about your tax liability, making timely payments, and exploring available adjustments, you can navigate the tax landscape with confidence and ensure compliance with HMRC regulations. If in doubt, please do reach out to us and we would be happy to discuss with you further.

Further reading on payments on account, HMRC self assessment and tax bills

• From HMRC: Understand your Self Assessment tax bill: Payments on account

• From Sage (accounting software): What is payment on account and how do I pay it?

• From HMRC: Pay your Self Assessment tax bill: Overview

• From HMRC’s Community Forum: Payment on accounts

• From Simply Business (business insurance): Self Assessment payment on account – a guide for the self-employed

HMRC Payments on account FAQs

Is payment on account compulsory? 

Payments on account are compulsory if you meet HMRC’s criteria. This includes if your Self Assessment tax bill is more than £1,000 and less than 80% of your tax has already been collected at source.

How does payment on account work?

Payments on account are advance payments towards your next year’s tax bill, and these payments are due on 31 January and 31 July. Splitting the tax bill in half helps to spread the cost of your tax rather than paying it all in one lump sum.

What happens if I earn more or less than expected?

If you earn more than expected, you’ll need to pay extra tax  after your tax return is filed. If you earn less, you may be due a tax refund.