If you work for yourself, you will need to understand the self assessment tax rules.
The following guide looks at the HMRC payment on account requirements. How are these advance payments calculated and can they be reduced? We also look at the penalties imposed by HMRC for either late returns or late or non payment of tax.
What is self assessment?
Self assessment is a system that HM Revenue and Customs (HMRC) uses to calculate and collect income tax usually from individuals with multiple sources of income. Under the self assessment regime, individuals must report what money they receive in a tax return. This includes people who are self-employed as sole traders. You must complete a self assessment return for each tax year, even if no tax is due.
If you are required to file a self assessment return with HMRC as a sole trader, you will need to do so after the end of the tax year that it applies to. The tax year runs from 6 April, so your return for any year can be filed any time from the following 6 April onwards. You can either file your tax return online using your unique taxpayer reference number (UTR), or download and complete form SA100 and send this to HMRC by post.
Your self assessment tax return will need to be submitted by the relevant deadline date. This date will depend on your method of filing. If you are filing by post, HMRC must receive your tax return, together with any money you owe, by midnight on 31 October of the same year. If you are filing online, this time is extended to midnight on 31 January of the following year.
This means that any self assessment return and payment due for the 2021-2022 tax year must be made by 31 October 2022 (for postal returns) and 31 January 2023 (for online returns).
What is a payment on account?
A payment on account refers to payments that self-employed people need to make on top of their bill for the previous tax year.
These are advance tax payments, including Class 4 National Insurance contributions, made twice yearly by self assessment taxpayers to spread the cost of tax for the upcoming year.
These payments not only help sole traders stay on top of their tax liabilities, they also ensure the self-employed do not unfairly benefit from paying tax in arrears when compared with employed people who are taxed at source.
When is payment on account due?
If you are required to make payments in advance towards the tax bill for the upcoming year, these will fall due in two instalments.
You will need to make both these payments on account unless your last self assessment tax bill was less than £1,000 or you have already paid more than 80% of all the tax you owe, for example, where sufficient tax was deducted at source.
The first deadline date for payments on account is midnight on 31 January with a second payment deadline of midnight on 31 July.
This means the first payment on account instalment falls due on the same day that you submit your self assessment tax return and pay your tax bill for the previous year.
It is therefore important you have enough money set aside to meet these additional payments. In many cases, especially for the newly self-employed, you may be presented with a bill that is significantly higher than you were expecting because of any payment on account that falls due.
How is a payment on account assessed?
Payments on account will be calculated based on your previous year’s tax bill. In this way HMRC make a prediction about your future trading income based on your past income.
Each of these two payments will normally be half your previous year’s tax bill, where HMRC automatically assumes you will continue to earn at the same rate, such that you will pay approximately the same amount of tax the following year.
If, after you have made your two payments on account, there is still tax to pay because your tax liability is greater than the previous year, a further balancing payment will also be required. This will fall due by midnight on 31 January the year after both your payments on account have been made.
This means that if your self assessment bill for the 2021-2022 tax year is assessed at £3,000, and you made two payments on account last year of £1000 each, so a total of £2,000, the total tax to pay by midnight on 31 January 2023 is £2,500. This includes your balancing payment of £1,000 for the 2021-2022 tax year (£3,000 minus £2,000) and the first payment on account of £1,500 (half your 2020 to 2021 tax bill) towards your 2022-2023 tax bill. You will then have to pay your second payment on account of £1,500 by midnight on 31 July 2023.
Similarly, if you do not completely clear your subsequent tax bill after you have made both your payments on account in 2022, you will again need to make a balancing payment in January 2023, together with any payment on account to offset against your next return.
Can payment on account be reduced?
If you have no tax to pay after you have made your two payments on account, there will be no balancing payment to make. In some cases, if your earnings have significantly reduced over the course of the year resulting in an overpayment, you will be entitled to a rebate.
If you know that your tax bill is going to be lower than last year, for exmaple you know your trading profits are down, or if there is any other reason why you owe a lesser amount, and ask to reduce your payments on account. You can apply to do this online, or download form SA303 and send this to HMRC by post.
You can check what you owe by signing into your online account using your UTR number. You will need to select the option to view your latest self assessment return. This will enable you to see any payments on account that you have already made, as well as any payment you will need to make towards your next tax bill and when this falls due.
When making an application to reduce your payments on account, care should always be taken not to reduce your payments by too much. If your net income is the same or higher in the next tax year, you will still have to pay the amount assessed, meaning you have only delayed the financial burden. You will also still be liable for any underpayment, and HMRC will charge you interest and penalties on the outstanding balance.
What are the penalties for late or non payment on account?
There are penalties for both filing your self assessment return late, together with fines and interest charges for late or non payment of any tax due, including payments on account. It is therefore important that you file your return and make any payments due by the relevant deadline date. This means ensuring that you factor in any payment processing time.
If the payment on account deadline falls over a weekend or bank holiday, your payment must also reach HMRC on the last working day before.
The .gov online tool for calculating penalties does not take account of any payments you have already made, or any outstanding interest, penalties or credit for previous tax years. That said, it can give you some indication of any indebtedness to HMRC.
The good news is that, in some circumstances, you can appeal against a penalty if you have a reasonable excuse for late payment. You will usually have a period of 30 days from the date of the penalty notice to submit an appeal. If you miss this deadline you must explain the reason for the delay so that HMRC can decide if they will still consider your request.
If you appeal, an HMRC officer who was not previously involved with your penalty decision will carry out a review. If you disagree with HMRC’s review, you can ask the tax tribunal to hear your appeal. You must again do this within 30 days of the review decision.
How do I register for self assessment payment on account?
If you are self employed and did not send a return last year, you will need to register with HMRC for self assessment by 5 October in the second tax year that you have been running your business. You can again be fined if you fail to do this within the relevant timeframe. Whether you will be required to make a payment on account will depend on how much you have earned and how much tax you have otherwise paid during your first year of trading.
Once you have completed the questions, HMRC will create your account. You will then receive a letter with your 10-digit UTR number, usually within 10 working days, although this can take longer.
You will need your UTR to file a self assessment return as a sole trader. You will then receive another letter from HMRC with an activation code for your account. Once you have activated your account, you can file your tax return any time before the deadline date.
If you have previously filed a self assessment return but did not use the online service, you can create an account using your UTR. This can be found on previous tax returns and other documents from HMRC. You can also call the self assessment helpline on 0300 200 3310 to request your UTR. Once you have registered to use the online service you will receive a letter with a code to activate your account.
What can I do if I cannot make a payment on account?
Signing up for self assessment is the easy part. Often, the hard part is in finding the funds to pay your tax bill in full. In theory, self assessment payment on account is designed to help sole traders spread out their tax burden. In practice, any unexpected or overlooked additional payment on top of any tax liability for the past year can often lead to more financial hardship for those already struggling to pay. This problem is then often compounded by penalties for any failure to pay, either on time or at all, together with interest on any outstanding balance.
If you cannot discharge your tax liabilities as and when they fall due, including a payment on account, you should contact HMRC as soon as possible. You may be able to spread any outstanding payments under a monthly instalment plan or be given additional time to pay.
Payment on account FAQs
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Legal disclaimer
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law or tax rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert professional advice should be sought.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
