The concept of HMRC Payment On Account can be tricky to get your head around so here is the official definition of payments on account along with an example of how they work.

HMRC Definition of Payments on Account

Payments on account affect those who are self employed and pay tax by 31 January each year via a self assessment tax return.

If this is you then HMRC will ask you to make a payment in advance of your next tax bill (including Class 4 National Insurance but NOT Class 2 National Insurance) in two instalments on the 31 January and 31 July each year.  By each deadline you must pay 50% of your previous years tax bill.

An Example of HMRC Payments On Account

Say for example your tax bill for 2016/2017 was £12,000 then you will need to pay £6,000 by 31 January 2019 and 31 July 2020, which are contributions towards your 2017/2018 tax bill.  Once you submit your 2017/2018 tax return and work out your true tax liability, you can deduct the £12,000 you paid and make a balancing payment or even get a refund.

Who Needs to Pay HMRC Payments On Account

You must make two payments on account to HMRC every year unless:

  • your last Self Assessment tax bill was less than £1,000;
  • you’ve already paid more than 80% of all the tax you owe, for example through your tax code or because your bank has already deducted interest on your savings.

What if Your Earnings Take a Dip?

If you are self employed or choose to stop being self employed and go back into full time employment, HMRC will still expect you to make payments on account even though you know your tax bill will be much lower. You can apply to HMRC to Reduce Your Payments On Account.

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