Understanding payments on account for Self Assessment

As a self-employed individual or landlord, you’re responsible for managing your own tax affairs. One important aspect of Self Assessment tax returns is making payments on account.

What are payments on account?

Payments on account are advance payments towards your tax bill for the next tax year. They’re made in two equal instalments, with the first payment due by 31 January and the second by 31 July.

How are payments on account calculated?

The amount of each payment on account is calculated based on your tax liability from the previous tax year. HM Revenue and Customs (HMRC) will automatically calculate your payments on account and provide the details on your Self Assessment tax return. Each payment is equal to 50% of your previous year's tax liability.

For example, if your tax liability for the previous tax year was £10,000, your two payments on account for the current tax year would be £5,000 each, due by 31 January and 31July.

Why are payments on account important?

Payments on account are important because they help you manage your tax payments throughout the year. By making advance payments, you can avoid a large payment of tax each year. Additionally, payments on account make sure that you’re meeting your tax obligations in a timely manner.

It's important to note that payments on account are based on your previous year's tax liability so if your income has significantly changed and you expect your tax liability to be lower in the current tax year, you can apply to reduce your payments on account. However, you must estimate your tax liability accurately to avoid underpayment penalties as HMRC will charge interest where the payments on account have been reduced too much.

On the other hand, if you expect your income to increase, or perhaps you switch from being taxed via PAYE to self-employment, you could face a large tax payment as payments on account would have been lower, or even nil in the previous year. If you have an accountant, let them know of changes such as this so they can estimate your liability to help you save for your tax bill.

Need help?

Payments on account help manage your tax obligations. By making advance payments towards your tax bill, you can spread the cost and avoid any financial surprises at the end of the tax year. It's important to stay organised, keep track of your income and expenses, and accurately estimate your tax liability to make sure you’re making the right payments on account.

If you have any questions or need help with your Self Assessment tax return, please get in touch with us. Call 0330 024 0888, email enquiry@larking-gowen.co.uk or submit an enquiry here.

Jamie Butcher