If you’re self-employed or earn income outside PAYE, you might have come across something called Payments on Account. It can feel like a bit of a surprise tax bill 💸, but don’t worry—we’ll break it down in simple terms so you know exactly what to expect!
What Are Payments on Account? 🤔
Payments on Account are advance tax payments HMRC asks you to make towards your next tax bill. They exist because, as a self-employed person, you don’t have tax deducted at source like employees do through PAYE.
Essentially, HMRC estimates your upcoming tax bill based on your most recent Self Assessment and asks you to pay half of that amount in advance, twice a year.
Who Has to Make Payments on Account? 👀
If your last Self Assessment tax bill was over £1,000 and you don’t already have 80% or more of your tax collected through PAYE, then you’re likely required to make Payments on Account.
So, if you have a side hustle, freelance, or run a business alongside employment, you might be on the hook for these extra payments!
When Do You Need to Pay? 📅
There are two key deadlines for Payments on Account:
– 31st January – First Payment on Account (covering half of your estimated tax bill for the year ahead)
– 31st July – Second Payment on Account (covering the second half)
And if after the tax year ends, you find that you still owe more tax, there may be a balancing payment due by the following 31st January.
How Are Payments on Account Calculated? 🔢
HMRC bases your Payments on Account on your previous year’s tax bill. Here’s how it works:
1️⃣ Take your last tax bill (excluding student loans, Class 2 NICs, and capital gains tax).
2️⃣ Divide it by two.
3️⃣ That’s how much you’ll need to pay **on each deadline** (31st January & 31st July).
Example:
– If your last tax bill was £4,000, your Payments on Account would be £2,000 in January and another £2,000 in July.
If your income drops significantly, you can **apply to reduce your Payments on Account** (more on this below 👇).
What If You Can’t Afford the Payments? 😬
Payments on Account can feel like a big hit, especially if your income isn’t as high as last year’s. The good news? You can apply to reduce them if you expect your next tax bill to be lower.
⚠️ Warning: If you reduce them too much and end up underpaying, HMRC may charge interest on the shortfall. So, be realistic with your estimate!
If you’re struggling to pay, HMRC may allow you to set up a Time to Pay arrangement to spread the cost over several months.
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How to Pay Your Payments on Account 💳
You can pay HMRC in several ways:
✅ Online via your HMRC account
✅ Bank transfer (using the correct payment reference)
✅ Direct Debit
✅ Debit/Credit card (beware of fees!)
✅ At your bank or by cheque (if you’re old-school 🏦✉️)
Always use your Unique Taxpayer Reference (UTR) as your payment reference to make sure it lands in the right place!
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Final Thoughts 💭
Payments on Account can be a bit of a shock if you weren’t expecting them, but understanding how they work helps you plan ahead and avoid nasty surprises.
✅ Set aside money throughout the year 📊
✅ Check if you can reduce them if your income has dropped 📉
✅ Pay on time to avoid penalties ⏳
If you’re unsure or want to check whether you’re paying the right amount, get in touch with us at Dead Simple Accounting—we’ll make sure you stay on top of your tax without the stress! 😊