Payment on account guide: What is it & how does it work?

What are tax payments on account?

‘Payments on account’ are the advance payments you’ll need to make towards your self assessment tax bill if you’re self-employed. These are for the work you’re expecting to undertake in the future, not for work already completed.

There are two instalments and each payment is calculated as half of the previous year’s tax bill. HMRC payments on account are designed to spread the payment process throughout the year to help small and medium business owners with cash flow management.

How do payments on account work?

You make your payment on account when you pay your self assessment tax bill through your HMRC online account. There are a few different ways to pay your full tax bill including online banking, cheque by post, at your bank or over the phone via bank transfer.

It’s worth doing this before the deadlines to ensure your payment goes through on time to avoid any penalties. Paying through online banking is one of the most efficient ways as it allows for a quick next-day payment. You can also set up a direct debit with HMRC for convenience and peace of mind.

When to make tax payments on account

There are two self assessment deadlines for making your tax payments on account:

1. Midnight on 31 January for any tax you owe for the previous tax year (a balancing payment) and your first payment on account for the upcoming tax year.
2. Midnight on 31 July for your second payment on account for the upcoming tax year.

New to filing your own tax return? Find out how to fill in a self assessment tax return online.

What to do if you can’t afford your payments on account

The added amount to your tax bill can be a shock, especially when you first sign up as self-employed. You might be wondering if payment on account is compulsory or if you can opt out.

Unfortunately, it is compulsory. However, if you think it’s likely that you won’t be able to afford a big lump sum, you can arrange to make regular monthly or weekly payments towards your next tax bill by setting up a budget payment plan. This way you choose how much you can pay and how often.

It’s worth considering such an option if you can’t afford your payment on account. If you miss the payment deadline, you’ll be charged interest and may have to pay a penalty causing further financial headaches down the road.

Payment on account example

Say you signed up as self-employed in 2022, here’s how you would pay your tax for the following year in 2023/24.

Your first self assessment tax return was for the tax year 2022/2023 which you filed by 31 January 2024. Once you submitted your return, HMRC calculated that you owed £5,000 in tax for the 2022/2023 tax year (remember that the tax year runs until 5 April).

When you paid your £5,000 tax, you were also charged £2,500 (this is your first payment on account for the upcoming 2023/2024 tax year). You’ll have to pay the second part (another £2,500) by 31 July 2024. Once you have calculated your 2023/2024 tax liability, you will be able to deduct the £5,000 already paid on account. However, you must remember that payments on account will also be due for the next tax year if your tax liability is over £1,000.

The first time you file your tax return, you’re effectively paying 150% of your tax. Once the first year is out of the way, as long as you haven’t been underpaying on your tax, it gets easier as you’ll be ahead on all of your tax contributions.

How does a payment on account refund work?

Being self-employed often means an unstable income and you might end up paying too much tax if your work decreases the following year. If this is the case you’ll be entitled to claim a payment on account refund.

Once HMRC has received your tax return they’ll decide if you’ve paid too much tax and are eligible for a refund. If you’ve previously provided HMRC with your bank details they should automatically refund the amount to your account.

If you haven’t provided your bank details, or the refund doesn’t happen automatically, you can request a refund by clicking ‘Request a repayment’ in the left-hand menu of your HMRC online account. Your refund should be with you within two to four weeks. If you haven’t received it in six weeks you should contact HMRC.

You can choose whether you’d like to receive a cheque in the post, be paid directly into your bank account or have the amount deducted from your next payment on account (if you’re due to pay one soon).

How can you reduce your payments on account?

You can reduce your payments on account either online or via post. To apply online you’ll need to sign in through your Government Gateway account and fill out their digital form. Alternatively, you can apply via post using the SA303 form.

Reducing your payments comes with some risk so be careful when deciding whether to do this. If you reduce your payments but end up underpaying your tax as a result, HMRC will charge interest on the amount you’ve underpaid by and potentially charge penalties. Underpaying also means you’ll need to keep an eye on saving for your end of year tax bill to make sure you have enough. It could be worth chatting to an accountant or bookkeeper to help you manage your payments and overall cash flow.

How to streamline payments on account with Xero

Xero’s software can provide a real-time view of your cash flow and financial performance to help you predict the amount you’ll owe for payments on account. By tracking your actual income and expenses, Xero will alert you if you’re falling short of your targets.

There’s also a handy tax return integration tool to make your tax return process even smoother. You can integrate Xero with the tax software or platforms you use to submit your self assessment tax returns, which will then be able to use data directly from Xero to calculate your tax owed, including payments on account. This can streamline the process, keeping it as simple and sweet as possible.

Find out more about how to manage your income tax with our Making Tax Digital for Income Tax Self Assessment content hub.