Payments on account: Why should a self-employed person pay half their tax upfront?

Hi Marc

I would just like to add that this 'payment in advance' approach is particularly unfair to freelancers because many work for larger companies and the payment culture in the UK is often very poor.

Typically, a freelancer will have to wait 60 days or longer to get paid by clients and yet the HMRC wants payments in advance which can cause major cash flow issues for many freelancers.

It's time government departments valued the contribution of freelancers and micro businesses to the UK economy and the greater societal contribution they make. They should treat these very small businesses fairly and with more respect for their unique circumstances and roles in our society.

Kind regards
Jill Poet

If you are self-employed then you will most probably encounter payments on account. If your tax liability for the year is more than £1000 then you will have to pay this again as payments on account against next year's tax liability. The payment is split into two instalments 50% in January and 50% in July. This can be a major shock if you haven't budgeted for this additional tax payment or you weren't expecting it. Payments on account bring the self-employed someway in line with employees who pay their taxes via PAYE.
The only problem with payments on account is they are based on this year's tax liability, if you earn less money next year then you will have paid too much tax. You can apply to reduce your payments on account, but if you reduce them by more than the tax amount actually due then interest will be charged on the underpayment

In our experience, the proportion of clients who struggle to pay VAT, PAYE or Self Assessment taxes is much higher in the Self Employed than Limited Company spheres, which is down to a lack of financial knowledge, poor tax planning or sometimes sticking their heads in the sand and ignoring it.

Tax planning is key to ensuring that reserves are put aside each month and being aware of what is due, and when, rather than spending all income as it is received as working capital. This is why HMRC requests payments on Account, to ensure that it has money on account in advance of tax due– A bit like putting a deposit down on a holiday, but not as fun.

Where good records are kept, tools such as Quickbooks Self Employed will estimate your tax liability through the tax year, ensuring reserves can be saved and paid when due.

As an employee, you have to pay every month towards your taxes, but as a self-employed individual, you could effectively be 10 months after the tax year before you make any contributions at all to the tax system. This is clearly unfair on those who are employed.

By the time the payments on accounts are due, the clients are already 10 months into the tax year to which the payments relate and the second payment is after the tax year in which an employee would have already paid.

Our clients implement Profit First into their business which means that they have for their taxes on a monthly basis, so by the time the payments on account are due, they will have already saved for 22 months meaning they should have more than sufficient to pay the amounts of tax that are due.

It is very common for self-employed clients to feel that payments on account are unfair but they often forget that they have already had the benefit of their full earnings from April to January, whilst people who are in employment will be paying tax every month.

It is a shame that Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) has been delayed until 2026 as this will give taxpayers much better insight into their liabilities in real-time, despite the added administrative burden it will cause, which will help to budget throughout the year.

If your business is growing it can be difficult to know how much to save towards your year-end tax bill, but if you keep on top of your bookkeeping you can estimate your current liability based on your profits for the year so far, or appoint an accountant to do this for you.

If we consider you a new business, starting Jul 22, you don't have to pay tax on your profits until Jan 24. As the tax period runs from Apr 22 - Mar 23 & your first filing on account isn't due until Jan 24. Therefore you have received 19 months without paying tax on any profits, I would say this is pretty generous of HMRC.

Majority of businesses are set up to continue trading into the next year, no one sets up a business thinking 'I only want one year in business'. Therefore when HMRC request payment on account, you could consider it as their way of showing you that they believe in your business and that future.

If company books are worked on monthly we can estimate what that bill may be, thus allowing for monthly savings to occur.

If kept up to date an accurate heads up of what is due in Jan can be provided 1st Apr

This is done to help spread the cost of a big tax bill at the end of the year. PAYE people pay this every month instead, so it's no real difference except for accuracy. Its actually tax on income you have already earned too. Who doesn't complain about tax though, it's quite universal but also, but there is nothing we can do about it. I advise that you put aside 20% of your income every time you get paid, then you have some savings and it's not quite as big a hit when it comes around. I expect HMRC hold payments on account in a high-interest account so they earn well from it. It's a sensible thing to do!