Payment on account deadline looming: avoid 7.5% interest penalty on your tax bill

Self-assessment taxpayers have until midnight on 31 July to make their second 'payment on account' instalment.  

These advance payments, which mainly apply to self-employed taxpayers and those with other sources of untaxed income, are not optional and if you fail to settle the bill on time, you'll be charged a penalty for late payment. 

But it's not the only deadline you'll be fined for missing. HMRC slapped more than 180,000 taxpayers with a fine for not filing a tax return last year, even though they didn't owe a penny.

Here, Which? explains what self-employed taxpayers need to know about payments on account and the rules around missing deadlines.

What are payments on account and who has to pay?

Payments on account are advance payments towards your tax bill (including National Insurance), made in two instalments. The first is due by midnight on 31 January and the second by midnight on 31 July.

The arrangement mostly applies to self-employed workers who tick the following boxes:

• They have been self-employed for at least a full year
• Their last self-assessment tax bill was more than £1,000 
• They haven't already paid more than 80% of all the tax owed, for example through your tax code or because your bank has already deducted interest on your savings.

The payments on account system also apply to those who have rental property income or other sources of untaxed income that exceed the threshold set by HMRC.

• Find out more: how to fill in a self-assessment tax return

How much will you have to pay?

Each payment is worth 50% of the total amount of tax you paid in the last financial year. If it turns out you actually owe more tax than you already paid in advance, then a final balancing payment may be due by 31 January of the following year. Conversely, if you've paid too much tax, you'll be owed a refund. 

You can also apply to reduce your payments on account if you know your profits have fallen for the tax year in question. 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.

• Find out more: Tax returns 2023: important deadlines

How to pay your bill

There are several ways you can pay, though HMRC doesn't accept personal credit cards and you can no longer pay your tax bill at the Post Office.

To get the payment to its destination on the same or the next day, use Faster Payment or Chaps, online and telephone banking services, a debit card, or a business credit card. Paying by Bacs or by cheque in the post can take around three days – but cheques could take much longer to arrive if there are postal delays. 

Check how long each method takes and allow time for it to go through. 

If you'd prefer, you can also pay your self-assessment bill via the free HMRC app. The app can also help with information such as your UTR number, National Insurance number, tax credit payments, and any PAYE information.

• Find out more: how to file a self-employed tax return

What happens if you don't pay on time?

There is no £100 fine for being late in July, but interest is charged on the amount owed. That currently stands at 7.5% because it is set at 2.5 percentage points above the Bank of England base rate. It may increase further when the base rate is reviewed again in August.

HMRC also imposes the following late payment penalties:

• 5% of any tax unpaid 30 days after the due date
• 5% of any tax unpaid five months after the due date
• 5% of any tax unpaid 11 months after the due date

Other fines for missed deadlines

Not filing on time

If you fail to file your online tax return by 31 January, you could face an initial £100 penalty. After three months, this increases to £10 per day (for up to 90 days). Further penalties are triggered if your return is more than six or 12 months late. 

Even if you don't think you owe any tax this year – perhaps because your earnings were below the £12,570 income tax threshold or you are now in full-time employment – you should double-check whether HMRC still requires you to file a self-assessment tax return.

The tax office handed out fines to 184,000 people in the 2020-21 financial year for failing to complete a self-assessment tax form on time, according to HMRC data obtained in a freedom of information request by thinktank Tax Policy Associates. That's despite their income being so low, they didn't actually owe anything. 

The Guardian reports that after the appeal, the number of these low earners that had to pay the fine was reduced to 126,000.

Paying late

You’ll likely also face late payment charges if you haven't paid your tax bill – the deadline is also 31 January. 

You’ll be charged daily interest from the date the payment was due and there may be further penalties if you're several months late paying your tax bill.

Making a mistake

Making a mistake on your self-assessment form can also land you a hefty fine. HMRC issued more than 18,000 penalties to taxpayers over careless mistakes made on tax returns last year, according to tax specialists at Thomson Reuters. The Daily Mail reported that penalties ranged from a telling-off to fines of up to 30% of the unpaid tax. 

Almost 11,000 taxpayers were deemed to have made deliberate errors, such as concealing income, and they were fined between 20% and 70% of the tax owed. 

Tot up your bill using the Which? 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.