Reducing your payments on account

As a sole trader, you have quite a long time to pay your tax bill after the end of the year.

The bill for the tax year that ended on the 5th April 2021 is due 31st January 2022.

That means the tax owed on the work you got paid for in April 2020, isn’t due until a full 20 months later. This can make it really hard to save the right amount for your tax bill throughout the year.

HMRC have an imperfect solution to this problem, which is payments on account.

You’ll only get asked to start making payments on account after you’ve submitted your first tax return, where your tax bill is over £1,000.

What are payments on account?

Think of payments on account as a way of paying your tax bill off in advance.
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The idea is to spread the cost of the upcoming year’s tax bill. And your payments are calculated by looking at your previous tax bill and assuming you’ll be earning the same amount the year after.
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Let's look at an example:
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For the tax year ending 6th April 2020, your tax return is due by 31st January 2021. And as well as paying your tax bill for that year, you’ll also make your first advance payment on account towards the next tax year (2020-2021).
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You’ll then make a second payment on account towards your 2020-2021 tax bill on 31st July. And finally you’ll have to make a balancing payment by 31st January. And the cycle starts again with your first payment on account for the next tax year.

Finding out how much you owe

You can check your payments on account at any time on the gov.uk website:

• Sign in to your online account
• Select the option to 'view your latest Self-Assessment return'
• Select ‘View statements’

You’ll then be able to see any payments on account you’ve already made as well as payments you need to make towards your next tax bill.

If you earned less than last year, you could reduce your payments on account

One of the challenges with the way HMRC calculates payments on account is that it’s based on last year’s tax bill. So if you earn less for any reason, you could end up overpaying.

If you expect this to happen, which is quite common in the wake of Covid-19, there are two ways you can ask HMRC to reduce the payments on account.‍

‍1. Online through your self-assessment

• Sign in to your online account
• Select the option to view your latest Self Assessment return
• Select ‘Reduce payments on account’

2. Complete the SA303 form

• Use the online service or postal form to apply

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Estimating your tax bill isn't always straightforward. If you reduce your payments on account because you expected your income to fall, but it turns out that your tax bill is higher than you thought, you could be charged interest by HMRC. So if in doubt, it's always worth speaking with an accountant. They can advise on your specific situation and help make sure you pay the right amount of tax.