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Introduction
What are HMRC payments on account (HMRC POA) and how do they occur for contractor and director Self Assessment? Basically, when you’re a UK contractor, you may need to make POA to the tax office, depending on your overall income in the tax year. The HMRC Self Assessment payment on account system is for those affected to make POA in respect of the following year’s tax liability. Therefore, POA applies when you’ve a UK tax liability, if you meet certain criteria. When this applies, you make a HMRC payment on account twice a year under the SA system. However, as mentioned, POA are on account of the following year’s tax liability. In this guide, we’ll consider the POA system and how it applies. We’ll also research the process of how do I reduce my payments on account.
Contractor payments on account are advance payments of the following year’s tax bill. POA can arise when you’ve a tax bill for the current year. By tax bill, we mean you’re due to pay some tax as it hasn’t all been deducted at source. In other words, all your income is not PAYE salary. Therefore, a UK tax liability will arise if you’ve untaxed income, such as dividends, rental profits, self-employment income, repayments under student loans or other untaxed income.
Therefore, let’s research an SA tax return for contractors and discover how POA work. We’ll look at paying your Self Assessment tax bill and what to consider for your HMRC tax payments. Also, we’ll research how to pay your Self Assessment tax bill. Further, we’ll look into how to reduce POA. Indeed, this question often arises for taxpayers who file under HMRC SA. Therefore, let’s consider how you pay Self Assessment tax and how the POA system works.
Initial thoughts on payments on account
First thoughts
When you’re a director of your own UK contracting company, you’ll complete your HMRC Self Assessment tax return each year. Also, as you complete your contractor Self Assessment (UK), please ensure you do not make errors before filing this. When we consider HMRC, contractor errors or mistakes will cause more issues later on. Therefore, it is best to get your contractor self assessment tax return right from the outset. In this guide, we’ll focus on how do Self Assessment payments on account work in practice. We’ll also look into under HMRC, reduce payment on account and how to do this.
Once complete, you must file your contractor SA tax return with HM Revenue & Customs (HMRC). After you complete your contractor SA filing, you’ll know your tax liability. What’s more, you’ll also know if you need to make any HMRC POA. Therefore, let’s look into how POA for SA work in the UK.
Most limited company contractors who run their own company will let their contractor accountants handle the filing of their contractor UK tax return. However, even when you run your own UK contractor limited company, it’s good for you to know how contractor SA works. Besides the HMRC payment on account system, it’s also essential to ensure that you do not make errors on your Self Assessment tax return.
Common questions
Contractor and business owners alike will have questions on how the POA system works in the UK. Therefore, such questions could include:
- What is a Self Assessment payment?
- How do payments on account work?
- What is a balancing payment on Self Assessment?
- How do I pay HMRC underpaid tax?
- What is a balancing payment for Self Assessment?
- How to pay HMRC?
- What is a balancing payment (HMRC)?
- How to pay underpaid tax to HMRC?
- How to reduce your Self Assessment tax bill?
In this guide, we’ll look into how Self Assessment on account payments work in the UK. We’ll also take a look at an example of HMRC SA payments on account and how we work these out. Further, we’ll look into when you might reduce payments on account (Self Assessment) and how to do this.
What to consider with regard to payments on account
When POA may 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 SA. As a result, they’ll report all their income on a HMRC Self Assessment tax return.
Based on your total overall income, you may be required to make POA for SA. Therefore, when it comes to HMRC, contractors will need to make payments on account 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 have tax deducted at source through your tax code on your salary. On the other hand, your bank may have 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. The POA come in two equal payments. In addition, both Self Assessment payment on account will equal your previous year’s HMRC SA tax bill.
As part of your income tax return, you may need to pay Capital Gains Tax (CGT). This may apply of if you have made any capital 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. Key to note, your contractor POA doesn’t include any amount you owe for CGT or Class 4 NI.
Therefore, when paying Self Assessment tax, the amounts you pay are on account of next year’s Self Assessment tax bill. The SA first payment on account is due on 31 January, before the end of the current tax year. The second HMRC SA payment on account is due by 31 July, after the end of the current tax year. Once you complete your tax return for the following year, you will make a Self Assessment balancing payment. On the other hand, you may be due a refund. This will be the case if it turns out you have paid too much tax via POA.
Payments on account -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 apply for a HMRC payment on account reduction. As a result, you will pay the reduced payments on account to HMRC instead.
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, when paying your Self Assessment, you must budget for paying tax on account of the following year when you start out contracting.
How the payments on account system works in more detail
Once you make your first HMRC POA Self Assessment tax return payment for 2023/24 by 31 January 2024, you will effectively be in credit with HMRC. The second HMRC tax return payment on account will be due by 31 July 2024 with any balancing payment (HMRC) for 2023/24 payable by 31 January 2025. 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 2023/24 is £18,000, you will pay the additional HMRC balancing payment of £3,000 to HMRC by 31 January 2025. 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 along with your contractor tax return filing.
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 HMRC 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 contractor 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 reduce your payments on account?
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 HMRC Self Assessment tax 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 thoughts
How to pay HMRC Self Assessment
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 a payment to HMRC Self Assessment via your personal internet banking. Before you make your contractor payment of SA tax, please refer to this HMRC guide online for the HMRC Self Assessment bank details. Basically, the HMRC Self Assessment payment details show which sort code and account number to use and the reference to quote when you are paying HMRC Self Assessment tax.
- You can also view this list of accepted payment methods that HMRC will accept. Many will pay HMRC Self Assessment online via the HMRC website. It is also easy enough paying HMRC Self Assessment online via your internet banking once you have HMRC’s bank details and know your payment reference.
If you are struggling to pay your tax
When you know you tax bill and POA, if you are unable to meet these you could contact HMRC. Indeed, when you do, you can ask them about a HMRC payment plan (Self Assessment) and as long as you assure them you will stick to this, they should allow this to be set up.
Your own online personal tax account 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. You can then look within your account how to add Self Assessment to personal tax account and, once you have added this, it will show your tax liabilities. You can use your HMRC Self Assessment login to access your account at any time. Therefore, when you log into your HMRC Self Assessment account, this will show your current liability. Your HMRC personal tax account will also show any POA that are payable. If you reduce your POA, you can log into Self Assessment to make sure that HMRC update this. In addition, there is also other helpful information in your HMRC online account, such as tax codes and state payments.
Final thoughts
This guide explains how Self Assessment payment on account work for UK contracting professionals. As mentioned earlier, you will be required to make payments on account 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. Then, when the tax becomes due in the future you can make the relevant HMRC payment (Self Assessment).
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
