If you’re a contractor or freelancer, you may have come across the term 'Payments on Account' in your Self-Assessment tax return.
Payments on account are advance payments towards your Income Tax and Class 4 National Insurance Contributions (NICs) for the current tax year. They’re based on your previous year’s tax bill and help spread your tax payments across the year, rather than paying one large lump sum.
Who Needs to Make Payments on Account?
You’ll usually need to make payments on account if:
- Your last Self-Assessment tax bill was more than £1,000, and
- Less than 80% of your tax was already collected through PAYE (for example, from employment income).
If this applies to you, HMRC will automatically include payments on account in your Self-Assessment calculation. There are two payment instalments each tax year, the first on 31st January and the second on 31st July. These advance payments help ensure your tax for the next year is partly covered.
How Are Payments Calculated?
Each instalment is typically half of your previous year’s tax bill (Income Tax and Class 4 NICs), after deducting any tax already paid at source. For example, if your tax bill for the previous tax year was £10,000, your payments for the following tax year will be £5,000 on 31 January and £5,000 on 31 July. When you file your next tax return, HMRC will compare your actual tax liability to these payments. If you’ve overpaid, you’ll get a refund or credit. If you’ve underpaid, you’ll make a balancing payment by the following 31st January
Common Questions
I think I’ve paid too much tax, what can I do?
If your income for the current year is lower, we can often reduce your payments on account before the deadline. If you’ve already overpaid, HMRC will refund or credit the difference when your tax return is submitted. Completing your tax return early gives you more time to adjust payments.
I don’t think I’ve paid enough tax, what happens?
Any shortfall is settled as a balancing payment by 31 January of the following year, along with your first payment on account for the next tax year.
This is my first tax return, why is my bill so high?
It’s a common surprise! In your first year, you’ll pay the full tax due for the current tax year plus the first payment on account for the following year. We recommend setting aside tax funds throughout the year to avoid a shock in January. Keeping a separate savings account for tax can help. Remember, if you’re a company director, your Self-Assessment tax is a personal liability and must be paid from personal funds, not your company account.
Not Sure What You Owe?
Payments on account are designed to make tax payments smoother, but they can still catch people off guard, especially in your first year of Self-Assessment. If you’re unsure how much to pay or want to avoid paying too much, it’s always best to speak with a Workwell accountant before the deadlines. Please get in touch 01923 257257.