If you are self-employed and you have a tax bill above £1000, you pay a payment on account. This means you pay tax in advance of your expected earnings. It can be a fairly hefty lump of money on top of your tax bill, but there's no need to worry about it as it can be managed effectively.
Payments on account are tax payments made twice a year by self-employed Self Assessment taxpayers to spread the cost of the upcoming year's tax.
The first instalment is due by midnight on January 31 (the self-assessment tax deadline) and the second one by midnight July 31.
You need to make two payments on account every year unless:
1. Your last Self Assessment bill was below £1000
2. You've already paid more than 80% of the tax you owe (through your tax code or your full time employer e.g. if you have a side hustle)
The first instalment is due by midnight on 31 January (the self-assessment tax deadline) and the second one by midnight 31 July.
If you are self-employed, your tax bill is higher than £1000 and you don't match the criteria above then very likely have to make a payment on account.
HMRC , quite simply, uses the tax amount form your previous year and assumes that your self-employed earnings will be the same in the next year.
HMRC wants you to think ahead and anticipate your tax bill. It is a preventative measure to ensure you don't get caught short when it is time to pay your tax.
If you are employed, your employer puts you through Pay As You Earn (PAYE), and so your earnings are taxed immediately. Being self-employed, HMRC is attempting to give you some flex on your cash flow, so you can manage it effectively.
There is a solution! You’ll get a tax rebate and the next year, your payment on account will reflect your profit this year.
That said, if you know your tax bill will be lower than last year, you can request a lower payment from HMRC with an SA303.
That's awesome news, your business is doing great! Be sure to put some money aside as you will be required to make a balancing payment by 31 January (with your first payment on account payment for the following year) to cover the additional tax.
It's best to pay as soon as you can to avoid any charges or fines.
It is very likely that you will face interest charges. Your best bet is to get in touch with HMRC before this happens and raise it to them. Sometimes you can arrange a Time To Pay agreement.
To make your payment on account you need to be registered for self-assessment with a Unique Tax Payer Reference (UTR). With your UTR there are several ways you can pay:
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