{"id":12653,"date":"2021-11-29T08:36:13","date_gmt":"2021-11-29T09:36:13","guid":{"rendered":"http:\/\/www.cheapaccounting.co.uk\/blog\/?p=12653"},"modified":"2026-01-08T07:50:19","modified_gmt":"2026-01-08T08:50:19","slug":"10-things-you-should-know-about-payments-on-account-if-youre-self-employed","status":"publish","type":"post","link":"https:\/\/www.cheapaccounting.co.uk\/blog\/index.php\/10-things-you-should-know-about-payments-on-account-if-youre-self-employed\/","title":{"rendered":"10 things you should know about payments on account if you\u2019re self-employed"},"content":{"rendered":"<p>Many self-employed people (AKA sole traders) who complete a<strong>\u00a0<span style=\"color: #ff6600;\">Self-Assessment tax return<\/span>\u00a0<\/strong>for the first time are left somewhat baffled when their tax bill is much bigger than expected.<\/p>\n<p>It happens because after they file their first Self-Assessment tax return, they find out they need to make a \u201c<span style=\"color: #ff6600;\"><strong>payment on account<\/strong><\/span>\u201d<em>.\u00a0<\/em><\/p>\n<h4><strong><em>But, what are payments on account and what key things should you know about them?\u00a0<\/em><\/strong><\/h4>\n<p><strong>1<\/strong>\u00a0HMRC uses the payments on account system to ensure that it collects at least some of the tax you owe in the current tax year.<\/p>\n<p><strong>2<\/strong>\u00a0Payments on account are based on earnings in the previous tax year. They can make it easier to pay your tax bill at the end of the current year.<\/p>\n<p><strong>3<\/strong>\u00a0When you complete your Self-Assessment tax return for the previous year, you\u2019re nearly at the end of the current tax year. So, you\u2019re not really paying tax in advance at all.<\/p>\n<ul>\n<li>Take the tax year 2020\/2021, which finished on 5 April 2021. The tax for this year is due by 31 January 2022<\/li>\n<\/ul>\n<ul>\n<li>The next tax year, 2021\/2022, will finish on 5 April 2022; which is just over two months after the tax for the previous year is paid<\/li>\n<\/ul>\n<ul>\n<li>You would pay half of this tax bill on 31 January 2022 (10 months into the current tax year) and the other half on 31 July 2022 (four months after the end of the tax year).So, you\u2019re not paying anything in advance compared to the Pay As You Earn scheme, which taxes employees\u2019 income earned each week or month.<\/li>\n<\/ul>\n<h4><span style=\"color: #ff9900;\"><strong>HOW DOES IT WORK?<\/strong><\/span><\/h4>\n<p><strong>Jake\u00a0<\/strong>makes \u00a325,500 profit from his small business in the tax year 2020\/2021.<\/p>\n<p>He has no other income.<\/p>\n<p>He prepares his accounts and submits his tax return for the tax year 2020\/2021; this covers the period 06\/04\/20 to 05\/04\/21.<\/p>\n<p>The personal allowance (amount you can earn before you start to pay income tax) for the tax year 2020 \/ 2021 is \u00a312,500.<\/p>\n<p>His tax bill for the year (excluding his Class 2 NICs which are not included in the Payments on Account calculation) will be:<\/p>\n<p>Profit minus personal allowance = taxable income<\/p>\n<p>\u00a325,500 minus \u00a312,500 = \u00a313,000 taxed at 20% =\u00a0<strong>\u00a32,600 income tax due<\/strong><\/p>\n<p>Profit minus \u00a39,501= amount subject to Class 4 NICs at 9%<\/p>\n<p>\u00a325,500 minus \u00a39,501= \u00a315,999 x 9% =\u00a0<strong>\u00a31,439.91 Class 4 NICs due<\/strong><\/p>\n<p><strong>Total taxes due and payable by 31 January 2022 = \u00a34,039.91 for the tax year 2020 \/ 2021 plus Class 2 National Insurance.<\/strong><\/p>\n<p><strong><em>PLUS<\/em><\/strong><\/p>\n<p>1<sup>st<\/sup>\u00a0Payment on account for 2021 \/ 2022 due on 31<sup>st<\/sup>\u00a0January 2022 = 50% of previous tax bill = \u00a32,019.95<\/p>\n<p>The total due payable on 31<sup>st<\/sup>\u00a0January 2022 is \u00a36,059.86<\/p>\n<p>2nd Payment on account for 2021 \/ 2022 due on 31<sup>st<\/sup>\u00a0July 2022 = 50% of previous tax bill = \u00a32,019.96<\/p>\n<p>By 31<sup>st<\/sup>\u00a0July 2022 payments of \u00a34,039.91 would have been made towards the tax due for the tax year 2021 \/ 2022 which would have ended on 5<sup>th<\/sup>\u00a0April 2022.<\/p>\n<p><strong>4<\/strong>\u00a0If you\u2019re self-employed, your payments on account will include your\u00a0<a href=\"https:\/\/www.gov.uk\/self-employed-national-insurance-rates\">Class 4 National Insurance<\/a>\u00a0contributions (NICs).<\/p>\n<p><strong>5\u00a0<\/strong>If your tax bill for the year for which you\u2019re completing the Self-Assessment is more than \u00a31,000, you\u2019ll have to make a payment on account towards the current tax year.<\/p>\n<p>However, if more than 80% of your income is taxed at source (e.g. if you\u2019re a subcontractor working under the\u00a0<a href=\"https:\/\/www.gov.uk\/what-is-the-construction-industry-scheme\">Construction Industry Scheme<\/a>), you won\u2019t.<\/p>\n<p><strong>6<\/strong>\u00a0Payments on account must be made in two instalments: before midnight on 31 January in the current tax year and before midnight on 31 July.<\/p>\n<p style=\"padding-left: 60px;\"><strong><em>TOP TIP &gt;&gt;<br \/>\n<\/em><\/strong><em>Because payments on account must be made in two instalments, effectively, it means that in your first year you\u2019ll need to fork out 1.5 times your tax bill on 31 January, which is fine if you\u2019ve been budgeting for it as you go. To avoid tax bills that you can\u2019t afford to pay, make sure that you set aside enough of your earnings as you go. In second and subsequent years your payments on account are deducted from your tax bill leaving a balancing charge (additional tax to pay) or a refund if you\u2019ve paid too much.<\/em><\/p>\n<p><strong>7\u00a0<\/strong>If you still owe tax after you\u2019ve made your payments on account, you must make a \u201cbalancing payment\u201d by midnight on 31 January in the next year.<\/p>\n<p><strong>8<\/strong>\u00a0Payments on account won\u2019t include amounts you owe for capital gains tax or student loans (if you\u2019re self-employed). You pay for these in your balancing payment.<\/p>\n<p><strong>9<\/strong>\u00a0If you\u2019ve ceased trading or your profits are falling, you can request a reduction in your payments on account, using the Self-Assessment form, although it may not allow you to reduce payments on account to nil. Alternatively, you can use the HMRC form specifically for this purpose (i.e. the\u00a0<a href=\"https:\/\/www.gov.uk\/government\/publications\/self-assessment-claim-to-reduce-payments-on-account-sa303\">SA303 form<\/a>).<\/p>\n<p><strong>10\u00a0<\/strong>If your payment on account means you pay too much, because your actual tax bill turns out to be lower, HMRC will send you a refund. If you reduce your payments on account and underpay tax, you\u2019ll be charged interest.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Many self-employed people (AKA sole traders) who complete a\u00a0Self-Assessment tax return\u00a0for the first time are left somewhat baffled when their tax bill is much bigger than expected. It happens because after they file their first&hellip;<\/p>\n","protected":false},"author":1,"featured_media":13676,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1067,1033,1064],"tags":[],"class_list":["post-12653","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-to-review","category-1-about-accounts-and-tax","category-the-essentials"],"_links":{"self":[{"href":"https:\/\/www.cheapaccounting.co.uk\/blog\/index.php\/wp-json\/wp\/v2\/posts\/12653","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.cheapaccounting.co.uk\/blog\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.cheapaccounting.co.uk\/blog\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.cheapaccounting.co.uk\/blog\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.cheapaccounting.co.uk\/blog\/index.php\/wp-json\/wp\/v2\/comments?post=12653"}],"version-history":[{"count":8,"href":"https:\/\/www.cheapaccounting.co.uk\/blog\/index.php\/wp-json\/wp\/v2\/posts\/12653\/revisions"}],"predecessor-version":[{"id":13686,"href":"https:\/\/www.cheapaccounting.co.uk\/blog\/index.php\/wp-json\/wp\/v2\/posts\/12653\/revisions\/13686"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.cheapaccounting.co.uk\/blog\/index.php\/wp-json\/wp\/v2\/media\/13676"}],"wp:attachment":[{"href":"https:\/\/www.cheapaccounting.co.uk\/blog\/index.php\/wp-json\/wp\/v2\/media?parent=12653"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.cheapaccounting.co.uk\/blog\/index.php\/wp-json\/wp\/v2\/categories?post=12653"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.cheapaccounting.co.uk\/blog\/index.php\/wp-json\/wp\/v2\/tags?post=12653"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}