What are payments on account?

Definition of payments on account

Payments on account are the amount of Income Tax and class 4 National Insurance that some business owners have to pay to HMRC for a future tax year.

Who has to make payments on account

If your Income Tax and class 4 National Insurance totals more than £1,000 for a tax year and you don't pay tax at source on more than 80% of your income, you'll have to make payments on account.

'Paying tax at source' is when the tax is taken off and paid over to HMRC before you receive the income - like your employer does if you are paid wages.

Payments on account are due on 31st January and 31st July, and are worked out as half the previous year's tax and class 4 National Insurance liability.

Class 2 National Insurance does not count towards payments on account.

Important: In response to the coronavirus crisis, HMRC gave Self Assessment taxpayers the option of deferring their July 2020 payment on account until 31st January 2021. Deferring this payment may have resulted in some taxpayers having to make the following three payments on or before 31st January 2021:

  • The deferred July 2020 payment on account
  • Any 2019 to 2020 balancing charge
  • The first 2020 to 2021 payment on account

Self Assessment taxpayers who cannot afford to make all three of these payments can arrange a Time to Pay arrangement with HMRC but this may have an effect on Class 2 National Insurance contributions. If you’re worried that you may be affected by this you should contact HMRC as soon as possible.

Example of payments on account:

Susan is a self-employed seamstress. She has Income Tax and class 4 NI of £1,200 to pay for her first year of business. This is all due to be paid to HMRC by 31st January.

Because her liability is over £1,000 and she does not pay tax at source, she must also make payments on account for the following tax year. These are due on 31st January and 31st July and are calculated as £1,200 / 2 each. This means that on 31st January, Susan must pay £1,200 + £600 = £1,800 to HMRC.

When Susan actually does her tax return, let's say her liability for that year was actually £1,300. She'll already have paid £1,200 on account for that, so she has only £100 to pay to make up the difference. This is called the 'balancing payment' and will be due by 31st January the following year.

Paying your Income Tax bill

If you're a sole trader, FreeAgent enables to find out how much Income Tax you owe and then submit your tax return directly to HMRC. As you go about your daily business FreeAgent works away, calculating your Self Assessment liability. When it's time to file, FreeAgent fills up to 90% of the Sole Trader Self Employment form and you can submit your tax return directly to HMRC.

Disclaimer: The content included in this glossary is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this glossary. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.

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