Payment on Account

Payment on Account is a way for self-employed people to pay their current tax bill and make an additional payment towards their next one.

Basically, you’ll pay 100% of your tax bill plus 50% of your next tax bill in one payment. Yep, an astronomical 150%. 😰

But before you panic, let’s go through it!

How does Payment on Account work?

HMRC expects anyone earning more than 20% of their income outside of employment to pay tax using Payment on Account.

On your first Self Assessment tax return, you’ll have to pay the entire bill, of course. You’ll also have to pay an extra amount. HMRC basically calculate half of your last tax bill… and add it on as an advance payment for this year’s tax bill. 😱

Why? Because you can never be too sure who’s planning on paying last year’s tax bill and not this year’s…

Confused? Let’s dive into an example.

If you owe £5,000 in tax, you’ll have to pay an extra £2,500 on top of this to cover part of your next tax bill.

⏳ You’ll pay your tax bill and the advance payment before the 31st of January. The next half is due before the 31st of July. ⌛

If you’re newly self-employed, you may be shocked to find you could end up paying a tax bill up to 50% higher. But fret not, if your next tax bill turns out to be less, your Payment on Account will be adjusted by HMRC. Phew!

On the flip side, if you earn more, then you’ll have to pay more tax. This is called a balancing payment. 

What happens if I can’t afford to pay in advance?

If you don’t think you can make your payment on account, you should get in touch with HMRC as soon as possible. They may agree to a ‘time to pay’ arrangement. This is how it works:

→ Let’s say you owe around £12,000 in taxes

→ Your PoA would be an extra £6,000

→ You can only afford to pay the £12,000 

→ You get in touch with HMRC and they decide what to do

Tip: if you just pay the £12,000 and not the extra £6,000, you’re likely to be hit with interest charges on the outstanding amount. 

We don’t even want to do the hypothetical maths on that one. So we definitely wouldn’t recommend this. 😅