The Basics of Paying Tax
Self Assessment is the name given to the annual Tax Return process for individuals with complex tax affairs or untaxed income, including the Self Employed and Company Directors / Shareholders.
- If your tax affairs are simple, eg employment, then tax is normally dealt with under PAYE rather than Self Assessment.
The Self Assessment return is made up to 5 April annually, and reports all sources of income, even if already taxed:
- Self Employment (sole traders)
- Partnerships
- Salary and Dividends from Companies (company directors)
- Salary and Wages from jobs
- Rents
- Savings Income, eg dividends and interest
- Capital Gains
A tax year runs from 6 April to 5 April, eg 6 April 2024 to 5 April 2025.
Normal Due Date
Tax calculated under Self Assessment for any given tax year is normally due on 31 January after the tax year
- eg 31 January 2025 for 2023-24 tax year.
It can be paid via HMRC website or online banking, and HMRC will send you a statement by post (don’t forget to tell them if you move house), or to your personal tax account if you are registered for electronic notices.
Sometimes HMRC will collect small amounts of tax due from your tax code. They can only do this if you have a job as well as self employed income. They can often make a mess of this, so it’s best to tick the box on your tax return to ask them not to!
Payments on Account
If your tax liability is more than £1,000 then you will normally have to make payments on account for the next year:
- Payments on Account are calculated automatically based on the preceding year
- This is then subject to a 50% payment on account in January and another 50% in July – these payments are offset against the “balancing” payment which is due the following January
- If the payments on account exceed the calculated amount due, you get a refund
- As an exception, if you have paid 80% of your tax at source, eg via PAYE, then even if your Self Assessment bill is over £1,000 Payments on Account won’t be due.
A common question is “Why do HMRC want me to pay my tax in advance?”. The thinking is it’s not really in advance; rather you are paying in-year as you earn, instead of paying after the tax year.
- Eg on 31 January 2025 you will pay your final Self Assessment balance for the 2023-24 Tax Year, and also a 50% payment on account for the 2024-25 Tax Year – you are 10 months into 2024-25 at this stage. Likewise, when the second 2024-25 payment on account is due in July 2025, you are almost four months after the end of the tax year.
- The balance of the 2024-25 tax will be due in January 2026, less the two payments on account (January and July 2025), plus a first payment on account for 2025-26, and so on.
As Payments on Account are calculated automatically from the previous year’s tax, if you know your income will be lower next year it is possible to apply to HMRC to have the Payments on Account reduced (see below).
Payments on Account tend to accelerate your tax payments if your business is growing, and the first time a Payment on Account is due, effectively 18 months tax in one payment, it can be an unwelcome surprise – to minimise this:
- make tax provisions each month as you go along – a separate bank or building society account is suggested
- get your Self Assessment return in early so you know what is due
Reducing Payments on Account
If your Payments on Account are too high – because you expect the current year’s tax bill to be lower than the previous year – then you can apply to reduce them either by:
- Sending in a SA303 form or
- Go into your online account with HMRC and there should be an option “reduce payments on account”
- Or you can tick the box on the self-assessment return that you are completing (Boxes 10 and 11 on the Tax Calculation Summary page).
Note – If you over state the reduction, retrospective interest is charged once it’s corrected.
Also be aware that the Payment on Account will only be part of your January tax bill, so make sure you are looking at the correct aspect of the January payment. The January tax bill will include over / underpayment for the previous year as well as the current year’s first Payment on Account.
If your income is expected to go up, you don’t have to correct Payments on Account upward – instead the balance will be collected the following 31 January.
Time To Pay
If you are struggling to pay taxes, then it’s advised that you contact HMRC and agree a payment plan as soon as possible. The longer it’s left, the more things can spiral.
Case Studies
This takes a bit of understanding. Let’s look at a couple of case studies:
Case Study 1
-
- Assume Self Employment started during 2024-25. Submit 2024-25 Self Assessment by 31 January 2026
- Tax bill for 2024-25 £1,200 from your Self Assessment Return – as it’s your first Self Assessment no previous Payments on Account have been made
- 31 January 2026 pay £1,200 for 2024-25 and £600 (50%) on account for 2025-26 – total to pay £1,800
- 31 July 2026 – pay another £600 50% payment on account for 2025-26 – You are now £1,200 paid toward 2025-26
- Some when between 6 April 2026 and 31 January 2027, submit 2025-26 Self Assessment return. Assume tax due is £2,000
- 31 January 2027 – pay £2,000 for 2025-26 but less the £1,200 paid on account (at £600 per instalment previous January and July), so balance £800 to pay. Also 50% on account for 2026-27 (50% of £2,000) = £1,000 each instalment (January and July 2027). Total to pay £1,800
- 31 July 2027 – pay another £1,000 50% payment on account for 2026-27 – You are now £2,000 paid toward 2026-27
- Between April 2027 and January 2028, submit 2026-27 Self Assessment.
- 31 January 2028 – offset the £2,000 paid in advance against the final amount for 2026-27, and make 2027-28 first payment on account.
Case Study 2
-
- Assume Self Employment started during 2024-25. Submit 2024-25 Self Assessment by 31 January 2026
- Tax bill for 2024-25 £1,200 from your Self Assessment Return – as it’s your first Self Assessment no previous Payments on Account have been made
- 31 January 2026 pay £1,200 for 2024-25 and £600 (50%) on account for 2025-26 – total to pay £1,800. However you estimate that your 2025-26 Tax Liability will only be £800, so reduce the Payments on Account to £400 each and pay £1,600 total.
- 31 July 2026 – pay another £400 50% payment on account for 2025-26 – You are now £800 paid toward 2025-26
- Some when between 6 April 2026 and 31 January 2027, submit 2025-26 Self Assessment return. Assume tax due is £750
- 31 January 2027 – pay £750 for 2025-26 but less the £800 paid on account (at £400 per instalment previous January and July), so balance £50 in your favour, which will be repaid to you. No payments on account due for 2026-27 as 2025-26 liability less than £1,000
- 31 July 2027 – no payment on account due
- Between April 2027 and January 2028, submit 2026-27 Self Assessment.
- 31 January 2028 – pay the final amount for 2026-27, and make 2027-28 first payment on account if appropriate.
As you will see from the case studies this takes some working out. Get taxes done early to avoid surprises and being rushed.
