This Content Was Last Updated on April 5, 2023 by Jessica Garbett
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 2023 to 5 April 2024.
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 2024 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).
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 its 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 proceeding year at a rate of 50% of the liability for the year just passed
- There is a 50% payment on account in January and another 50% in July – these are offset next January
- If the payments on account exceed the 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 its not 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 bill for the 2023-24 Tax Year, and a 50% payment on account for 2024-25 – 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 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, plus a first payment on account for 2026-27.
As Payments on Account are calculated automatically from the previous years 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 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 years 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”
Note – If you over state the reduction, retrospective interest is charged when its 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 years 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 next 31 January.
Time To Pay
If you are struggling to pay taxes, then its advised you contact HMRC and agree a payment plan as soon as possible. The longer its left, the more things can spiral.
Coronavirus has clearly caused problems paying taxes. This is our Guide on Payments on Account and Coronavirus, And this is from HMRC.
Case Studies
This takes a bit of understanding. Lets look at a couple of case studies:
Case Study 1
-
- Tax bill for 2022-23 £1,200 – from your Self Assessment Return (let’s assume this is your first Self Assessment, so no previous Payments on Account have been made)
- 31 January 2024 pay £1,200 for 2022-23 and £600 (50%) on account for 2023-24 – total to pay £1,800
- 31 July 2024 – pay another £600 50% payment on account for 2023-24 – You are now £1,200 paid toward 2023-24
- Some when between 6 April 2024 and 31 January 2025, submit 2023-24 Self Assessment return. Assume tax due is £2,000
- 31 January 2025 – pay £2,000 for 2023-24 less £1,200 paid on account (at £600 per instalment previous January and July), so balance £800 to pay. Also a 50% on account for 2024-25 50% of £2,000 = £1,000 each instalment. Total to pay £1,800
- 31 July 2025 – pay another £1,000 50% payment on account for 2024-25 – You are now £2,000 paid toward 2024-25
- Between April 2025 and January 2026, submit 2024-25 Self Assessment.
- 31 January 2026 – offset the £2,000 paid in advance against the final amount for 2024-25, and make 2025-26 first payment on account.
Case Study 2
-
- Tax bill for 2022-23 £1,200 – from your Self Assessment Return (lets assume this is your first Self Assessment, so no previous Payments on Account have been made)
- 31 January 2024 pay £1,200 for 2022-23 and £600 (50%) on account for 2023-24 – total to pay £1,800. However you estimate your 2023-24 tax bill will only be £500. Apply to reduce Payments on Account to £250 each. Total to pay £1,450
- 31 July 2024 – pay another £250 50% payment on account for 2023-24. You are now £500 paid toward 2024-24
- Some when between 6 April 2024 and 31 January 2025, submit 2023-24 Self Assessment return. Assume tax due is £480
- 31 January 2025 – pay £480 for 2023-24 less £500 paid on account (at £250 per instalment previous January and July), so refund of £20 from HMRC. As the tax bill for 2023-24 is less than £500 no payments on account are due for 2024-25 (normally January and July 2025)
- Between April 2025 and January 2026, submit 2024-25 Self Assessment.
- 31 January 2026 pay 2024-25 liability, plus a 50% Payment on Account for 2025-26 if 2024-25 is more than £500
As you will see from the case studies this takes some working out. Get taxes done early to avoid surprises and being rushed.
