Self-employed people will need to pay the second installment of their taxes for 2018-19 within the next week, as the deadline for payment on account is 31 July.
The tax payment will include estimated income tax owed from your profits, as well as Class 4 National Insurance contributions.
Which? explains who needs to make payments on account, how it’s calculated and what happens if you miss the deadline.
What is payment on account?
Payment on account is the term for making two advance payments towards your self-assessment tax bill.
The system was devised to spread tax payments across the year, so that you make a payment on 31 January, and another on 31 July.
HMRC will calculate your payments on account after your first full year of business. As a general rule, your payments for each year will be based on the previous year’s bill, although you can apply to lower them.
- Get a headstart on your 2018-19 tax return with the Which? tax calculator – tot up your bill and submit direct to HMRC
How does payment on account work?
Say you opened your business and submitted your first tax return for the 2017-18 tax year. In the first year, you’d pay all of the tax you owe on 31 January 2019.
At this point, HMRC would estimate how much tax you’re likely to owe for 2018-19. It will charge you half of it on 31 January 2019, meaning this could be a large bill for new business owners. The other half would then be paid on 31 July 2019.
If it turns out that you owe more tax than HMRC estimated, you’ll have to pay a ‘balancing charge’ on the following 31 January. For the 2018-19 tax year, you’d pay the balancing charge on 31 January 2020.
Balancing payments will also include anything you might owe for capital gains tax (CGT) and student loans. In addition, you’ll need to make your first payment on account for 2019-20.
If you earn more than HMRC estimated, it will increase your payment on account estimations for the following tax year. By contrast, if you earn less than HMRC predicted, you’ll get a refund and the payment on account charges will reduce.
|Deadline||What you pay|
|31 January 2019||Outstanding tax for 2017-18, plus first payment on account for 2018-19|
|31 July 2019||Second payment on account for 2018-19|
|31 January 2020||Outstanding tax for 2018-19, plus first payment on account for 2019-20|
Find out more: paying tax – self-employed
Who uses payment on account?
Most self-employed people will be required to pay tax via payment on account.
However, if you owe £1,000 or less, or if more than 80% of your tax bill was paid via PAYE, you can usually make a single payment.
Can you reduce how much you pay?
If you know your earnings will be less in an upcoming tax year, you can apply to reduce your payments on account. This will save you overpaying during the year and waiting for a refund.
You can do this online, where there’s a ‘reduce payments on account’ section, or by filling out and sending the form SA303 to your tax office.
You’ll need to provide a reasonable estimate of how much you’re likely to owe. Think carefully about your estimate – if you reduce your payments too much, HMRC may charge you interest on the shortfall when you submit your tax return.
Paying your self-assessment tax bill
While the deadline is midnight on 31 July, that doesn’t mean you can wait until 11:50pm to send your payment. The money must be received by HMRC by the deadline, and not all payment methods are instant.
HMRC has outlined how long you should allow for the various forms of payment it accepts – and some mean you’ll have to send your payment very soon.
Five working days:
- direct debit (if you haven’t set one up with HMRC before).
Three working days:
- direct debit (if you’ve already set one up with HMRC)
- cheque via post.
Same day or next day:
- online or telephone banking
- debit card online
- at your bank or building society.
What happens if I’m late paying my tax bill?
As you’re technically paying tax early with payment on account, HMRC doesn’t charge the same fines as it does for retrospective bills due on 31 January.
However, failing to pay your 31 July bill on time could mean you’ll be charged interest on the tax you owe until you make the payment. The interest rate is currently 3.25%, but it does vary.
Moreover, you’ll need to make sure your bill is fully cleared by 31 January, including any balancing payments.
If there’s any outstanding tax after this date, you’ll also be charged interest and could face the following penalties:
- After 30 days – a charge equal to 5% of the tax outstanding
- After six months – a further 5% charge
- After 12 months – an additional 5% charge.
These penalties are separate to those incurred if you miss the deadline to submit your tax return.
What if I can’t pay my bill?
If you’re going to struggle to pay the tax owed by 31 July, you should contact HMRC as soon as possible.
You’ll need to make a ‘payment proposal’ suggesting an alternative way of paying your bill, such as through monthly or quarterly installments.
HMRC will consider the proposal, and may ask about other assets you have (such as savings or investments) before accepting the offer.
- Find out more: late tax returns and penalties for mistakes