Payments on Account Explained
Payments on account are advance payments towards your Self Assessment tax bill. They're designed to help HMRC collect tax throughout the year rather than waiting until the end of the tax year. Understanding how they work is crucial for managing your cash flow.
**When do you need to make payments on account?**
If your tax bill for the previous year was more than £1,000, HMRC will ask you to make payments on account for the current year. These are typically due on 31 January and 31 July. If your bill drops below £1,000, you can ask HMRC to reduce or stop your payments on account.
**How much do you need to pay?**
Each payment on account is usually 50% of your previous year's tax bill (excluding National Insurance). So if you owed £4,000 in tax last year, each payment on account would be £2,000. When you file your Self Assessment return, HMRC calculates your actual tax bill and adjusts your payments accordingly.
**What if you overpay?**
If your actual tax bill is lower than your payments on account, you'll receive a refund. Conversely, if your bill is higher, you'll owe the difference. This is settled when you file your Self Assessment return.
**Reducing or stopping payments on account**
If you expect your tax bill to be significantly lower than the previous year, you can apply to HMRC to reduce your payments on account. You'll need to provide evidence of the expected reduction. If you stop trading or retire, you can also ask for your payments on account to cease.
**Managing cash flow**
For many self-employed individuals, payments on account represent a significant cash outflow. Planning for these payments is essential, especially in the early years of a business when cash flow can be tight. Some accountants recommend setting aside money each month to cover these payments.
**Learn more:** For professional guidance on this topic, visit [Accounted For Ltd](https://accountedforltd.co.uk/self-assessment).
Learn more: For professional guidance on this topic, visit Accounted For Ltd