If you’re a small business owner who files self-assessment tax returns and aren’t sure how paying on account works, paying your tax bill can naturally be confusing.
Unfortunately, it catches on with many new (and established) business owners and can lead to people paying more than they need to in interest and late payment penalties because they don’t have enough money to pay their tax bill.
So we want to clear up any questions you may have about paying your self-assessment tax. So you’ll never have to wonder when and how much you have to pay again.
In this article, we explain exactly what paying into account is, whether you’re required to pay into account, and when you need to make your tax payments.
Here’s what we cover.
What are the payments made on the account?
These are prepayments you make twice a year against your self-assessment tax bill.
HMRC estimates how much tax you owe for the coming year based on your previous year’s tax bill. You pay this estimate over two installation dates to spread your tax payments throughout the year.
HMRC has designed this process to help taxpayers monitor their payments and avoid late tax.
You can calculate your upcoming tax bill by cutting your previous year’s tax bill in half. Your actual tax bill won’t necessarily match the estimate because business income usually fluctuates from year to year.
So if the payments on your account don’t cover your total tax bill for the year, you’ll need to make a ‘residual payment’.
The two due dates for paying your self-assessment tax are:
- At midnight on January 31st (the same day as your self-assessment tax return due date) for any tax you owe for the previous tax year (residual payment) and your first payment for the coming tax year.
- midnight on July 31 for the second payment on your account for the upcoming tax year.
As a self-assessing taxpayer, you are required to make payments to HMRC unless you fall into one of the following two categories:
- Your last Self Assessment Tax bill was less than £1,000.
- 80% or more of your tax has been withheld at source through PAYE.
An example of how payment works on an account
Let’s say you became self-employed in May 2020 and completed your first self-assessment return for the 2020/21 tax year.
After completing your return, HMRC has calculated that you owe £500 in tax for the year, which is due by 31 January 2022. Your tax bill was under £1,000 so you didn’t have to pay for the next tax year.
During the next tax year (2021/22), you have made a larger profit and your bill for the 2021/22 tax year has reached £2,000.
As this is above the threshold, the payment process has been triggered on the account for the 2022/23 tax year.
Therefore, in addition to the £2,000 tax paid for the 2021/22 tax year, your tax bill also includes your first payment for the 2022/23 tax year of £1,000 (half your 2021/22 tax payment).
So you paid a total of £3,000 on 31 January 2023.
Your second payment of £1,000 for the 2022/23 tax year was made on 31 July 2023.
You have now paid a total of £2,000 towards your 2022/23 tax bill.
When you file your self-assessment tax return for 2022/23 and your tax bill comes to £1,800, for example, you’ll owe a £200 refund (the difference between the £2,000 you paid into the account and your actual tax bill).
In this case, your next payment for the next tax year, due on 31 January 2024, will be £900 (half your 2022/23 tax bill).
How and when to make account payments?
There are several ways you can pay, just make sure you allow enough time to make the payment before the deadline.
For same or next day payment, choose online banking, CHAPS, pay online with a personal debit card or corporate credit card (personal credit cards are not taken), or pay at your bank (you’ll need a payment slip from HMRC to do this);
Please allow three working days if you choose to pay by Bacs or check by post.
A convenient way to avoid missing a payment on your account is to set up a direct debit with HMRC. By sending this form to your bank, you are confirming to HMRC how much you have collected from your account. It will tell you in advance how much it will take and when.
Please allow five business days to process the direct debit when you first set it up.
If you prefer to make regular monthly or weekly payments toward your next tax bill, you can set up a budget payment plan. How much you want to pay and how often is up to you.
The money you’ve paid into your budget payment plan will be applied to your next tax bill, meaning you won’t be left with a large balance to pay at the deadline.
If your plan amount doesn’t fully cover your tax, you must pay the difference.
If you miss the payment deadline, you will be charged interest and may also have to pay a late payment penalty.
How to reduce payments on the account
All business revenues can fluctuate from year to year.
If you know your tax bill will be lower than last year, say you have fewer clients or your tax allowance has increased, you can avoid overpaying tax by asking HMRC to reduce your bill payments.
You can choose to do this online or by mail.
To do this online, log in to your online account. Select the option to view your latest self assessment return, then select ‘reduce payments on account’.
To apply by post, complete the SA303 form on the screen, print it and send it to the tax office.
Think carefully before you reduce your bill payment, because if you’re found to have underpaid, you’ll have to pay interest on the outstanding amount, which could significantly increase your tax bill.
Payment for account return
If you have paid too much tax, you have the right to claim a tax refund just like any other regular employee.
But as a self-assessment taxpayer, you claim a refund through the self-assessment process. This means that any overpayment will be processed after you file your next tax return.
As soon as HMRC receives your return, you’ll be told if you’ve overpaid.
You will then be able to choose how you would like the money refunded to you, such as by check or bank transfer. Alternatively, you can put it into a tax account for your next payment.
final thoughts on bill payment
Now you understand how HMRC calculates the payment on account, you should find it easier to predict your next tax bill.
For further assistance in this matter, an accountant will be able to assist you if you have any.
But as always, it’s best practice to file your self-assessment tax return as soon as possible at the end of the tax year to give yourself enough breathing room to pay off the balance without incurring interest or late payment penalties.
Editor’s Note: This article was first published in January 2023 and has been updated for relevance.