We’ve all heard of “tax rebates” when we pay too much tax… but why do they happen in the first place? It may come as a surprise: even though we use high-tech Self Assessment software, tax payments can still be wrong!
Today’s article explores HMRC’s “payments on account” system for Self Assessment tax bills. Although at first confusing, POA can actually be super straightforward and efficient (especially if you make use of free Self Assessment software).
By the end of the article, we aim for you to have a clearer understanding about how Self Assessment payments work, when to pay them, and why they're actually well designed!
What is Self Assessment?
Income Tax Self Assessment (or, simply, Self Assessment) is HMRC’s system for collecting Income Tax from self-employment (and other personal earnings). If eligible, we are expected to submit an annual report to HMRC regarding our income, as well as pay the tax due by certain dates.
As Making Tax Digital becomes the norm, many of us are already using free software (such as AbraTax) to file our Self Assessment tax returns directly with HMRC. This can save us a lot of time and effort – although it’s still vital to meet the essential deadlines.
What are “payments on account”?
“Payments on account” are advance payments on your tax bill. These payments are usually taken twice a year by HMRC (see the deadlines below). The payments on account are calculated based on last year’s tax bill.
For instance, if you paid £1,000 for your tax bill last year, you would be expected to pay two instalments of £500 in the current year. If your actual tax owed differs from last year (which is very likely), you will settle that later.
Note that this process does not apply if you paid less than £1,000 for your tax bill last year. If your last Self Assessment tax bill fell below £1,000, then you do not need to pay in two instalments. You might also be exempt if you pay tax through your PAYE tax code (see HMRC or details).
Self Assessment deadlines
Your Self Assessment tax return (when submitted online through free Self Assessment software) is due on 31 January. However, you also need to pay the tax. The usual Self Assessment payment deadlines are:
- Midnight on 31 January – Balancing payment + 1st POA instalment
- Midnight on 31 July – 2nd POA instalment
For 31 January, there are two payments to consider:
- If your Self Assessment shows that more tax is owed than was predicted by POA (payments on account), you need to make a “balancing payment” to settle this debt.
- If applicable, you will also make an advance payment towards next year’s tax bill. This is your 1st POA instalment (equal to 50% of the tax bill you are paying for the previous year).
The 31 July deadline is simpler:
- If applicable, you will pay your 2nd POA instalment (another 50% of last year’s tax bill amount).
Payments on account (POA) can be confusing at first, but it’s pretty simple once you get used to it. The main thing to remember is that you pay advance sums based on a prediction from last year.
Example scenario (self-employment)
September 2022 – You begin self-employment and will be liable to file Self Assessment for the tax year 2022–2023. The tax return (and payment) will be due in January 2024.
January 2024 – You pay your 2022–2023 Self Assessment tax bill on time (before midnight on 31 January 2024). The tax owed for your 2022–2023 income is £1,000. In addition, you pay £500 in advance (1st POA instalment) for the next year.
July 2024 – You pay another £500 (2nd POA instalment) before midnight on 31 July 2024.
January 2025 – Your self-employment has gone well, and your 2023–2024 Self Assessment bill from income is £1,600. This is £600 more than last year. Since you have already paid £1,000 through POA instalments, you make a balancing payment of £600. In addition, you pay £800 in advance (1st POA) for next year.
Why do we have “payments on account”?
The “payments on account” system provides a relatively simple way for HMRC to help people maintain steady payments. Since you pay an instalment upfront each January, this means you guarantee a contribution towards your next Self Assessment tax return.
By splitting POA across the year in two instalments, this also allows you to avoid the financial burden of paying a single, heavy lump sum once a year. Although the prediction based on last year’s bill might not be accurate, it is easily corrected by making a “balancing payment” to make up the underpayment.
However, what happens if you overpay?
What if you pay too much tax?
If you have paid too much tax through POA, don’t worry: you can expect a “tax rebate” (refund) from HMRC automatically.
If you expect your tax bill to be less than last year and want to avoid overpaying, then you can notify HMRC and reduce your payments in advance.
How to notify HMRC of reduced payments
To notify HMRC of reduced payments, start by logging into your personal tax account (via Government Gateway). Once logged in, select your current Self Assessment.
Look for an option to “reduce payments on account”. Alternatively, you can click here to log in directly to this page:
If you prefer paper, you can still fill in and send a postal form (“SA303”), accessible from the HMRC website. However, we advise making use of Self Assessment software online wherever possible. This is because HMRC's Making Tax Digital initiative plans are gradually phasing out paper-based options in an effort to reduce cost and minimise human error.
Summing up
After reading this article, you should now have a better understanding of the Self Assessment payments system. Although no doubt confusing at first glance, "payments on account" works surprisingly well – and it's not expected to be going anywhere soon, so we had better get used to it!
If you have any remaining queries regarding your personal circumstances, don't hesitate to contact an accountant or other tax professional. Furthermore, if you want to make your Self Assessment process even more convenient, why not consider using AbraTax to file your Self Assessment for free?