HMRC Payments on Account

As a self-employed individual, navigating the world of taxes can sometimes feel like a complex puzzle. One important aspect that often raises questions among the self employed is ” HMRC Payments on Account.”

In this blog post, we’ll aim to shed some light on this confusing concept and how they affect sole traders in the UK.

What Are HMRC Payments on Account?

HMRC Payments on Account are a peculiar yet crucial component of the UK tax system. They primarily apply to self-employed individuals, including sole traders. In simple terms, HMRC Payments on Account are advanced payments towards your tax bill for the upcoming tax year. Rather than settling your entire tax liability in one annual payment, HM Revenue and Customs (HMRC) splits the payment into two instalments.

The first instalment is due by the 31st of January, which covers your expected tax bill for the current tax year (ending on April 5th).
The second instalment is due by the 31st of July and acts as an advance payment for the subsequent tax year.

However, these payments are not blind guesses. HMRC calculates them based on your tax liability from the previous tax year. Each Payment on Account is usually half of the previous year’s tax bill.

How Do HMRC Payments on Account Affect Sole Traders?

Sole traders, being self-employed individuals, are subject to HMRC Payments on Account if their tax bill exceeds a certain threshold. If your tax and National Insurance bill for the previous year amounted to £1,000 or more, and less than 80% of this bill was already deducted at source (e.g., through PAYE), you’ll likely be required to make HMRC Payments on Account.

At first glance, this might seem like an additional burden. However, HMRC Payments on Account are designed to help you manage your tax payments more evenly throughout the year, rather than facing a potentially hefty bill all at once. Moreover, if your current year’s tax liability turns out to be lower than the previous year, the excess payment made through HMRC Payments on Account will be credited towards your next tax bill or refunded.

Exceptions and Adjustments

There are instances where HMRC Payments on Account might not be required. If more than 80% of your tax liability is deducted at source, for example, through an employer or pension provider, you might not have to make HMRC Payments on Account. Additionally, if you anticipate that your current year’s tax bill will be lower than the previous year’s, you can apply to reduce your HMRC Payments on Account. This can be done through your HMRC online account or by contacting your tax advisor.

Understanding HMRC Payments on Account

Understanding HMRC Payments on Account is essential for every sole trader in the UK. It ensures that you remain compliant with your tax obligations and provides a structured way to manage your tax payments. While it might seem a bit intricate initially, these payments offer a practical means of spreading your tax liability throughout the year, ultimately contributing to a more balanced financial planning strategy for your self-employed journey. Always remember, seeking advice from a professional accountant can provide you with personalised guidance based on your specific financial situation.

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