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Introduction
An HMRC Self Assessment payment on account is something that UK contractors may need to pay to the tax office twice a year depending on their overall income. The HMRC payments on account (HMRC POA) arise when you have untaxed income in the current tax year. This can include dividends or rental profits or other untaxed income e.g., Self Employment. Therefore, how does a HMRC payment on account come about as part of the Self Assessment (SA) system? Therefore, let’s investigate the POA system and also consider how do I reduce my payments on account as this is a question that often arises for taxpayers who file under SA.
When you are a director of your own UK contracting 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. Errors or mistakes will cause issues later on. Therefore, it is best to get your tax return right from the outset. In this article, we will focus on how do Self Assessment payments on account work in practice and under HMRC, reduce payment on account and how to do this.
Initial thoughts on Self Assessment payment on account (HMRC)
Once complete, you must file your SA 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’s look into how payments on account for Self Assessment work.
Most limited company contractors who run their own company will let their contractor accountants handle the filing of their tax returns. However, even when you run your own UK contractor limited company, it is good for you to know how SA works. Besides HMRC payment on account possibly being a consideration, it is also essential to ensure that you do not make errors on your Self Assessment tax return.
What to consider with regard to Self Assessment payment on account
When they apply
First, as a company director and shareholder, you may have untaxed income in the future. This will come 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 Self Assessment 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 SA 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. Basically, the payments on account (Self Assessment) are calculated on the previous year’s Income Tax bill only. What’s more 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 SA first payment on account is due on 31 January. Following on, the second is due by 31 July after the end of the current tax year.
Self Assessment payment on account (HMRC) -how do they work -an example
Let’s assume your total tax liability for 2022/23 was £15,000. This was previously payable in full by 31 January 2024.
In turn, your payments on account for 2023/24 are based on your 2022/23 liability. Therefore, you will need to make an advance HMRC payment on account of £7,500 twice. These are due by 31st January 2024 and by 31st July 2024.
You may be paying HMRC 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 2023/24 as you did in 2022/23.
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 Self Assessment payment on account system works in more detail
Once you have made your first HMRC POA, you will effectively be in credit with HMRC. Any balancing payment (HMRC) is payable by 31 January 2024. 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 2022/23 is £18,000, you will pay the additional £3,000 to HMRC by 31 January 2024. If your actual liability is £13,500, HMRC will refund the £1,500 overpayment to you.
The above may seem a little confusing. However, 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 SA system, it is possible to reduce payments on account (HMRC) for the following tax year. When we consider how to reduce payments on account (HMRC), you can apply for this via your Self Assessment account on the HMRC website online. You can also inform HMRC of this on your tax return. 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 make the reduction?
When you know what your HMRC POA will be for the following year, you might think about reducing these. It could also be tempting to do this without making the appropriate considerations. 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.
Other considerations
Self Assessment payment on account -checking what you owe with HMRC
Under SA, 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.
Pay 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
This article explains how Self Assessment payment on account work for UK contracting professionals. As mentioned earlier, you will be required to make payments on account for Self Assessment if your tax liability to HMRC is more than £1,000 and less than 80% of the tax that you owe has not already been taxed at source. It is often the case that a UK limited company contractor may ask how do I reduce my payments on account and we explain the process here.
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 in 2022/23 (£125,140 in 2023/24), the additional higher rates tax is 39.35% on dividends above this amount.
Link to Contractor Advice UK group on
