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5 things self-employed taxpayers should know about the 'payments on account' deadline

The payment to HMRC is due by midnight on 31 July 2022

If you are self-employed, time is running out to make your second ‘payments on account’ installment, which is due by midnight on 31 July 2022.

Payments on account are advance tax payments paid twice a year; you'll be able to work out how much tax you actually owe when you submit your self-assessment tax return.

With the deadline just a month away, Which? explains the rules and what you can do to prepare.

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What is ‘payments on account’ and who has to pay it?

If you have been self-employed for a full year, you may be asked to start paying tax in advance through the ‘payments on account’ arrangement. 

It applies to self-employed workers whose last self-assessment tax bill was more than £1,000, as long as you haven't already paid more than 80% of all the tax owed.

There are two payments a year - due by midnight on 31 January and 31 July. Each payment is 50% of what you paid in the last financial year, under the assumption you'll owe roughly the same amount of tax in the following year. If you still owe tax after this has been paid, a further 'balancing payment' may be due by 31 January of the following year.

For example, on 31 January 2022 you'll have paid 50% of your estimated tax for 2022-23, with the remaining 50% due by 31 July 2022. 

Once you've filed your tax return, the actual amount of tax you owe will be calculated. If the two payments on account don't cover what you owe, you'll make a further balancing payment on 31 January 2023. If you've paid too much tax, you'll be owed a refund. 

There are plenty of ways to pay

There are several ways to settle your tax bill, but pay attention to the time it takes to process the payment.

To get the payment to its destination on the same or next day, use the Faster Payment or CHAPS online and telephone banking service or debit and corporate card.

Paying by Bacs or by cheque in the post can take around three days - or longer if there are postal delays. 

HMRC doesn't take credit card payments for tax from individuals, and you can no longer pay your tax bill at the Post Office. 

If you don't pay on time, you'll be charged interest on the outstanding amount owed; the interest rate is set to rise to 3.75% from 5 July.

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Make sure you've budgeted for the payments

The idea behind payments on account is to help taxpayers stay on top of their finances, breaking down the tax due by 31 January into two smaller payments spread throughout the year. 

However, the payment can come as a surprise to newly self-employed people - particularly in the first year, when you usually have to pay tax for the previous tax year by 31 January, in addition to half of the estimated tax for the next tax year. 

If your tax bill tends to come as a nasty surprise, it can help to budget for it throughout the year, putting money away little and often to go towards it. 

If you’re self-employed, your income may fluctuate from month to month, but take a look at what you earned in the last three months and calculate the average. That should give you a rough idea of what you might expect to earn in the coming months. 

If you have multiple bank accounts and credit cards, then you might find it easier to budget via apps that use open banking technology. Open banking budgeting apps are useful for getting an overview of multiple bank accounts and credit cards in one place.

It may be easier to budget for you tax bill in future. From 2024, Making Tax Digital comes into force for income tax. It involves keeping digital records of accounts and sending summaries to HMRC every quarter (ie every three months), instead of filing one final return annually. The idea is that it will help people keep track of how much tax they owe in real time, therefore making it easier to budget for their tax bill. 

You can reduce the amount if you think you’re paying too much

If you know your profits have fallen, you can apply to reduce your payments on account. 

You can either fill out form SA303 and send it to your local tax office, or log in to your online tax account and visit the 'Reduce payments of account' section. 

You won't need to provide evidence that your tax bill will be lower. However, if you reduce your payments on account and it turns out that you owe a much higher figure, HMRC could charge you interest on the difference.

It could be worth filing early

There are lots of benefits to filing your tax return early, particularly if you pay tax by payments on account. 

Firstly, filing early means you’ll know how much tax you'll owe in advance. This can help budget for your next tax bill, and - if you can see you'll have paid too much - can also speed up getting a tax refund, too.

By making a refund claim from HMRC before its busy period in January, you're more likely to receive the money more quickly than if you waited. 

What's more, filing early can also help you avoid extra penalties. Not only will you avoid late filing charges, but you're also less likely to be charged a penalty for making mistakes that come from being in a rush.

Consider using the Which? tax calculator

If you need help filing your self-assessment or with payments on account, consider using the Which? tax calculator

This online tool is easy-to-use, jargon-free, and helps you tot up your tax bill while suggesting expenses and allowances you might have forgotten. When you're done, it can also submit your return directly to HMRC.