How to Reduce Your Payments on Account

When you're self-employed and operating as a sole trader, you have quite a long time to pay your tax bill after the end of the tax year. For example, the deadline for the tax year that ended on the 5th April 2022 is 31st January 2023.

That means the tax owed on the work you got paid for in April 2021 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 a solution to this problem, which is called payments on account. But sometimes that solution has its flaws—and you might need to ask to reduce those payments.

Read on for a refresher on how payments on accounts work, and how to reduce them if you need to.

What are payments on account?

Think of payments on account as a way of paying off your tax bill in advance.
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The idea is to spread the cost of the upcoming year’s tax bill, rather than having to pay it in one big chunk. And to calculate how much these payments should be for, HMRC looks at your previous tax bill and assumes 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 2022 (the 2021/22 tax year), your tax return is due by 31st January 2023. But as well as paying your 2021/22 tax bill on that date, you’ll also make your first advance payment on account towards the next tax year (2022/23).

You’ll then make a second payment on account towards your 2022/23 tax bill on 31st July 2023.

And finally you’ll have to make a balancing payment (the difference between what you paid up-front and what you actually owe for tax) by 31st January 2024. The cycle then starts again, with your first payment on account for the next tax year.

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

Find out more about payments on account.

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.

How to reduce your payments on account

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

If you expect this to happen—which is quite common in the wake of Covid-19 and the current economic climate—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

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.

If in doubt: ask an accountant

And finally, if you're feeling uncertain about your finances, we definitely recommend you work with an accountant.

Having an accountant is valuable beyond just compliance and tax planning—it’s about having someone by your side with the experience to help you make the big decisions and build a better business.

Coconut also makes it really easy for you to collaborate with your accountant. Once you've invited yours through the app, they'll be able to view your business activity and bookkeeping data whenever they need to.