What Does Payment on Account Mean?
“Payments on Account” refer to paying advance payments to HMRC in relation to your tax bill. Primarily, these payments are usually due by midnight on 31 January and 31 July each year and each payment is half your previous year’s tax bill.
This specifically applies to self-employed taxpayers and it helps them avoid paying huge tax bills at once. The tax bill is effectively paid in TWO payments.
Why do I have to make Payments on Account on my Tax Return?
Self-employed individuals usually complete self-assessment tax return and pay taxes on 31 January and 31 July. It means that they pay the first payment on account 9 months after the tax year end (5th April).
How It Works
The payment on account concept is based on HMRC’s prediction about your future income. HMRC predict that your income will be consistent with the previous year.
For example, if your tax liability for the year ended 5th April 2021 is £5,000. The first payment on account payment of £2,500 (50% of tax bill) will be made on 31 January 2022 and the second payment on 31 July 2022. This does mean if you have not made payments on account previously, your first payment on account would be on top of your tax liability. So you would need to pay £7,500 by 31st January 2022.
That being said, you will have paid £5,000 towards your 31st January 2023 tax liablity.
If the actual liability is greater than what you were assessed for, a further balancing payment would be required to settle the remaining liability, and if the actual liability turns out to be lower than what you paid tax on, you will receive a refund from HMRC.
