14 AUG 2023 12 MIN READ

If you’re self-employed, there can be so much to keep on top of. We’ll walk you through payment on account and what to do if you’re struggling to pay your self-assessment tax bill at the end of the year. When in doubt, speak to a qualified accountant to check over your specific financial situation.

What is payment on account?

Anyone who is self-employed will have to make tax payments known as payments on account throughout the year. By paying tax in two instalments during the year, it means your tax payments are spread out and that you aren’t handed a major bill at year-end that you might not be financially prepared for.

The first instalment is due on the same day as self-assessment tax returns, so it’s important to be prepared for this as missing a payment can result in fines or high interest rates. Payments are calculated based on your previous year’s tax bill with each payment being half your previous year’s tax bill. These payments are usually due by midnight on 31 January and 31 July.

You might be exempt from payment on account if:

  • Your last self-assessment tax bill was less than £1,000
  • You paid more than 80% of the previous year’s tax you owed, for example through your tax code or because your bank had already deducted interest on your savings

Note: that payments on account do not include anything you owe for capital gains or student loans (if you’re self-employed) - you’ll pay those in your balancing payment on the self-assessment tax return.

What does this mean for small businesses?

Overall, payment on account can be helpful so that you already have money put aside toward taxes and you’re not caught out with a surprise bill. However, if you fail to pay on time or underpay your bill, there can be consequences.

Since the payment on account amounts are estimated, there’s a chance you’ll have overpaid if you earn less compared to the previous year. If this happens, HMRC will send you a refund for the amount you have over paid.

Filing your self-assessment tax return as early as possible will help you identify any potential underpayment or overpayment issues and give you time to rectify them.

How are payment on accounts calculated?

Your payment on account amounts are determined by your tax bill for the previous year. HMRC will estimate that you’ll earn roughly the same amount and that you’ll therefore pay roughly the same tax.

But if it’s your first year being self-employed, HMRC won’t have this data and you may start your business between payment on account due dates. If you start your business in September 2023, for example, you won’t be making any advance payments on account as there’s no previous data to estimate your tax bill on.

This means that come January 31, 2025, you’ll not only have to pay the tax you owed from the 2023/2024 tax year but you’ll also have to make your first payment on account for the 2024/2025 tax year. It’s important that you plan ahead so that you have the money to cover the previous year’s tax and the coming year’s advance payment otherwise you could end up paying late or underpaying.

An example of payment on account:

Taylor is self-employed and has her own trade business, working as a decorator.

Because Taylor’s tax bill in 2021 to 2022 was just £2,500, HMRC has calculated that this year, her payment on account payments will each be £1,250 during the 22/23 year. Taylor pays her first payment of £1,250 on 31 January 2022 and her second payment of £1,250 on 31 July 2022.

In January of 2024, when submitting her self-assessment tax return, Taylor realises she actually owes HMRC £3,500 in taxes. So far, her payment on account has only covered £2,500 in taxes so on the 31 January deadline, she needs to make a balancing payment of £1,000.

Taylor will also need to pay her first payment on account for the 2023 to 2023 tax year which will amount to £1,750.

That means Taylor’s total payment due on January 31, 2024, is £2,750.

Payment on account timeline for 2023 – 2024 tax year:

How much interest is charged?

HMRC’s interest rates are linked to the Bank of England base rate and will therefore change as the base rate changes. There are two different rates:

Late payment interest:

Used for people who pay HMRC late to encourage prompt payments. It is set at base rate plus 2.5%

Repayment interest:

Used to compensate taxpayers who overpay or pay early. It is set at base rate minus 1%, with a lower limit of 0.5% (known as the ‘minimum floor’)

As of May 2023, the base rate is 4.5%, so the late payment interest rate would be 7% while the repayment interest would be 3.5%. The most up to date information can be found on the Bank of England website.

Self-employed payment on account

To see payments you’ve already made and the payments you need to make, you’ll log in to your Government Gateway account. When making your payment, you’ll need to use your payment reference which is just your Unique Taxpayer Reference (UTR) number followed by the letter K. You should have been given this number when you registered as self-employed.

According to the UK Government website, these are a few ways that you can settle your tax bill and how long they will take:

You need a paying-in slip from HMRC to pay at a bank or building society.

  • Direct Debit (if you have not set one up with HMRC before)

Note: that HMRC is working to make tax digital and move as much of the tax paying process online as possible. Eventually, all businesses will be moving to an online system for tax, so if you use paper filing at the moment, you may want to start familiarising yourself with online methods.

Payment on account refunds

If you find that your payment on account has been in excess of the tax you actually needed to pay, then you are entitled to claim a tax refund. This will happen through the self-assessment tax return process and will be identified once your return has been submitted.

If HMRC identified that you have overpaid in tax, they’ll refund you and you can choose how it is paid or you can put it towards your next payment on account bill.

How do you reduce payment on account?

If you’re certain that this year’s tax bill will be lower than last year’s and that you won’t end up underpaying or paying HMRC late, then it may make sense to reduce your payments on account.

You can do this by post or you can do it online by following these steps:

View your latest Self-assessment tax return

Select ‘Reduce payments on account’

If you want to reduce your payments by post, follow the same steps above and then:

Select to reduce your payments on account by post

Remember that if you reduce your payment on account and it then turns out you’ve underpaid, you’ll have to pay interest on the outstanding amount.

Note: that reducing your payment on account could save you money in the immediate term, but cost you in the long run, so consult an accountant before deciding whether or not to proceed with this.

Has my payment on account been paid?

Checking if your payment on account has been paid is easy.

Just log into your Government Gateway account and view your latest self-assessment tax return.

From there you should be able to click ‘view statements’ and see any payments on account that have already been made as well as upcoming ones.

Note: Be sure to note these dates and amounts down so you don’t miss a payment or under pay!

Do I have to pay payment on account?

Some people will be ineligible for payment on account and therefore unable to do it. You must have tax liability other than tax paid via PAYE that is at least £1000 and at least 20% of your total tax bill.

What happens if tax payments are missed?

Don’t ignore the situation as HMRC charges high interest on late payments. If HMRC thinks you will be able to keep up with repayments, then you might be able to use their Time to Pay arrangements and set up a repayment plan.

Every payment plan under Time to Pay is based on your business’ specific circumstances, so there is no standard plan to base this off of. Time to Pay plans can cover all outstanding amounts overdue, including penalties and interest.

The personalised repayment plan is also not fixed, so you can shorten the repayment period if your receive a cash windfall or lengthen it if needed.

According to HMRC’s website: Over 90% of Time to Pay arrangements are completed successfully.

For self-assessment tax bills, you may be able to set up a payment plan online. You can set up a payment plan to spread the cost of your latest self-assessment bill online without calling HMRC if:

  • You owe £30,000 or less
  • You do not have any other payment plans or debts with HMRC
  • Your tax returns are up to date
  • It’s less than 60 days after the payment deadline

If you’re eligible for a repayment plan, HMRC advises that you might want to have the following information on hand:

  • The reference number relating to the bill that you want to discuss
  • Any other debts the business owes HMRC
  • Any tax repayments owed to the business
  • The business’ financial position
  • What efforts have been made to raise the funds against the business’ debt
  • What has been done to try to pay the tax bill
  • What the business has done or is doing to get its tax affairs back on track and to afford repayments
  • For the business’ bank account details, so that a Direct Debit can be set up

Staying on top of payment on accounts

If you find it difficult to just pay twice a year towards your tax bill, it is possible to break this down into monthly or weekly payments instead. This can make it easier to stay on top of paying and make it feel more incremental rather than having two big lump sums to pay off.

This is called a Budget Payment Plan and you’ll get to choose how much you want to pay and how often. HMRC has a tool so you can check if you’re able to set up regular payments for your tax bill.

Note: This works the same as the twice-annual payments on account, so if the amount in your plan does not cover your next tax bill in full, you’ll need to pay the difference, but if you’re in credit, you can request a refund.

Set up a Budget Payment Plan for HMRC

Before starting, you’ll want to have your 11-character payment reference on hand as you’ll need it to set up a new Direct Debit. This is your 10-digit Unique Taxpayer Reference (UTR) followed by the letter ‘K’.

  1. Go to your HM Revenue and Customs (HMRC) online account
  2. Click to set up a Direct Debit
  3. Choose the Budget Payment Plan option
  4. Follow the instructions to set up your plan

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