HMRC Self Assessment payments on account

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Introduction

An HMRC Self-Assessment payment on account is something that you may need to pay when you are a UK contractor or director of your own company. The HMRC payments on account (HMRC POA) arise when you have untaxed income (such as dividends or rental profits) or have a tax liability from the previous year. Therefore, how does an HMRC payment on account come about as part of the Self-Assessment system? In addition, how do Self-Assessment payments on account work in practice?

When you are a director of your own company, you will complete your HMRC Self-Assessment tax return each year. When completing your contractor Self-Assessment, please ensure you do not make errors before you file this.

Once complete, you must file your Self-Assessment tax return with HM Revenue & Customs (HMRC). After filing your return, you will know your tax liability and if you need to make any HMRC POA. Therefore, let us look into how payments on account for Self-Assessment work.

Most contractors who run their own companies will let their contractor accountants handle the filing of their tax returns. However, it is good for you to know how Self-Assessment works. Besides POA possibly being a consideration, it is also essential to ensure that you do not make errors on your Self-Assessment tax return.

Self-Assessment payment on account

When they apply

First, as a company director and shareholder, you will have untaxed income in the future, which comes in the form of dividends. When an individual has untaxed income such as dividends, self-employment income, rental profits, etc., they must register for Self-Assessment and report all of their income on a HMRC Self-Assessment tax return.

Based on your total overall income, you will be required to make payments on account for Self-Assessment to HMRC unless:

  • Your last SA tax bill is less than £1,000, and
  • You have already paid the tax you owe on at least 80% of your income. For example, you pay tax at source through your tax code on your salary. Alternatively, your bank has already deducted tax on your interest income.

When do you pay HMRC POA?

Under your contractor Self-Assessment, HMRC will base the future POA on the previous year’s tax bill. These come in two equal payments that add up to your previous year’s Self-Assessment tax bill.

As part of your income tax return, you may need to pay Capital Gains Tax if you have made any gains. You may also need to pay Class 4 National Insurance (NI) if you are self-employed. Notably, the payments on account (Self-Assessment) are calculated on the previous year’s Income Tax bill only. Please note that the POA does not include any amount you owe for Capital Gains Tax or Class 4 NI.

Therefore, the amounts that are payable on account in the future are against the following year’s tax bill. The first payment is due on 31 January, and the second is due by 31 July after the end of the current tax year.

Self-Assessment payment on account -how do they work -an example

If your total tax liability for 2020/21 was £15,000, this was previously payable in full by 31 January 2022.

In turn, your payments on account for 2021/22 are based on your 2020/21 liability. Therefore, you will need to make an advance HMRC payment on account of £7,500 twice.  These are due by 31st January 2022 and by 31st July 2022.

You may be paying Self-Assessment payments on account as set out above, and you are earning less in the current tax year than in the previous year. Therefore, you will need to consider if you should reduce your POA.

You can ask HMRC to reduce your POA (please see below) to make a reduction. If you do not request any reduction, HMRC will assume that you will have earned earn at the same rate in 2021/22 as you did in 2020/21.

The above may come as somewhat of a shock when you are new to the contracting world; however, this is how the system operates. Therefore, you must budget for paying tax on account of the following year when you start out contracting.

How the HMRC POA system works in more detail

Once you have made your first POA, you will effectively be in credit with HMRC. Any `balancing payment’ is payable to HMRC by 31 January 2023. If it turns out that your liability is less than the £15,000 in the above example, HMRC will refund any overpayment.

In the above example, if your actual tax liability in 2021/22 is £18,000, you will pay the additional £3,000 to HMRC by 31 January 2023. If your actual liability is £13,500, HMRC will refund the £1,500 overpayment to you.

The above may seem a little confusing, but your accountant should be there to help and guide you around this.

HMRC -reduce payments on account

How do I arrange reducing payments on account?

If your income will reduce in the following tax year you will need to consider, how do I reduce my payments on account. As mentioned, under the Self-Assessment system, it is possible to reduce payments on account for the following tax year. You can apply for this via the HMRC website online. However, you should only go about reducing payments on account, if you are reasonably sure your taxable income will decrease in the next tax year.

When can you do this?

When you know what your HMRC POA will be for the following year, you might think about reducing these, and it could be tempting to do this. If you reduce POA, you reduce your tax burden. Please consider this carefully first of all, though. If you reduce your payments in the future and it turns out they are too low, this would create an issue as you will have underpaid tax. HMRC will also charge interest if you pay your POA late.

If required, your accountant will be able to apply to reduce your POA. HMRC will issue a refund if you do not reduce your POA and your tax liability for the following year is lower than the current year.

Self-Assessment payment on account -checking what you owe with HMRC

Under Self-Assessment, you can check what you owe to HMRC at any time by setting up an online personal tax account with them. When you log into your account, this will show your current liability, and it will also show any payments on account that are payable. In addition, there is also other helpful information in your HMRC online account, such as tax codes and state payments.

Paying your Self-Assessment tax to HMRC

When you come to making payment of your Self-Assessment payments on account or your balancing liability or indeed any other tax underpayment, you can:

  • Make payment via your personal internet banking. When you do this, please refer to this HMRC guide online. It details which sort code and account number to use and the reference to quote with the payment.
  • You can also view this list of accepted payment methods that HMRC will accept.

Final thoughts

Depending on your monthly drawings/dividends from your company, you should be saving for any personal tax as you go along in a personal savings account.

In tax, HMRC treats dividends as the top slice of your income in your tax calculation. Any dividends in your basic rate tax band will incur Basic Rate tax at 8.75%. Meanwhile, any dividends in the higher rates tax bracket (gross income above £50,270) will incur a higher rate tax of 33.75%. If you are lucky enough to earn over £150K per annum, the additional higher rates tax is 39.35% on dividends above this amount.

Link to Contractor Advice UK group on

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Published On: August 1st, 2022 / Categories: Member Only Articles (Technical!), Self-Assessment /

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