Self-Assessment – how do payments on account work?

When transitioning from PAYE employment to a self-employed role, one of the main changes you must become accustomed to is that tax will no longer be deducted at source. Therefore, you’ll need to set aside money to pay this in your tax return, which is where ‘payments on account’ come into play.

James Foster, Senior Commercial Manager at SJD Accountancy, explains more:

How do payments on account work?

Payments on account are advance tax payments made twice a year by people that receive income that isn’t taxed at source i.e. contractors that withdraw dividends from their limited company.

These payments will be calculated based on the previous year’s tax, with each payment on account equalling 50% of the tax due and going towards the following year’s tax bill.

Devised to help the self-employed managing cash flow, they can often have an adverse impact if contractors are unaware of these, as the additional payments will come as a nasty surprise when a contractor files their first tax return.

How will I be affected?

Payments on account will impact you if:

  • You will pay less than 80% of the tax you owe at source i.e. through PAYE (which is why most people in ordinary employment are unaffected).
  • Your tax bill will be more than £1,000

So, if you became self-employed in 2018/19 and your tax bill for that tax year was £5,000 (and due on 31st January 2020), you would have to pay two payments on account for the 2019/20 tax year:

  • £2,500 on 31st January 2020 (making the total tax payable before this deadline £7,500)
  • £2,500 on 31st July 2020

These payments then offset against your 2019/20 tax bill, so in the above example, you would have already paid £5,000 towards your 2019/20 tax bill, so it’s important that you’re aware so you can set this aside also.

If your income the following year is higher, and as a result your tax payable is higher, there would be a balancing payment to make for your 2019/20 tax bill after you have filed that tax return. It works the same if the tax payable is less, then you would be due a rebate.

What if I don’t earn as much as previous years?

It is possible to lower your payments on account, if you have reason to believe your earnings for the current year are likely to be less than the previous year. You can complete a ‘reduce your payments on account’ form through your online Self-Assessment account or by completing form SA303.

Completion of these forms is also applicable when a contractor is no longer self-employed, as the tax paid in advance will not be required since it will be deducted at source. The employee will receive a rebate on the taxes paid through the ‘payment on account’ system.

If you’ve recently become self-employed and need help with your tax payments or require any other advice, get in touch with a specialist accountant at SJD Accountancy. You can find out more here.

Partner Contractor Accountants

Last updated: 31st March 2023