If you are new to paying your own taxes to HMRC as a sole trader, you may be wondering what a payment on account is. This is something that you are going to have to get familiar with and fast since it involves making an instalment on 31^st July.

Unfortunately, if you are trying to deal with paying your previous year’s tax bill on your own, it is going to be up to you to educate yourself. We have created this guide to help you so that you are not going to make mistakes. So, let’s take a closer look at payments on account.

What is Payment on Account?

First of all, it is important to know what is meant by payment on account. This is something that a self-employed person will have to do twice a year. In other words, it is a tax payment that is made that helps people to spread the cost of the following year’s tax amounts. HMRC will tell you how much to pay based on what tax you have paid the year before. Indeed, it is a prediction that is spread across two instalments. Namely, they are going to be made on the 31^st January and 31^st July.

It is important to realise that payments on account are going to include your Class 4 National Insurance Contributions. This can mean that the amount seems higher than you were expected. But, there should not be any student loan repayments to deal with or Capital Gains Tax. It can be beneficial to get professional advice from a tax accountant in Northwood in order to gain a better understanding of payments on account.

Do you have to Make Payments on Account?

There seems to be some confusion when it comes to payment on account. Since it is a tax bill you are paying in advance, people think that it is an optional payment. However, this is not how it works. Thus, you have a duty to make a payment on account by 31^st July. This is something that is expected of you. 

There are going to be some exceptions to the rule that can be made. But, you will have to contact HMRC and speak to them. This is something that a tax accountant will be able to help you with. For instance, you may be able to arrange a time-to-pay agreement that is going to help you recover and pay your tax bill.

Tips for Making Payments on Account

If you are new to making payments on account, you want to make sure that you do not experience any financial troubles. Here are some tips to avoid this happening to you.

Put Money Aside Every Month

When you are a sole trader, it is essential that you prepare for your tax bill. This is something that is going to be your responsibility and you need to ensure that you have the funds to pay the bill twice a year. Putting money aside to pay the bills is recommended. This makes sure you can pay them on time and you do not have to dip into your own savings account to do this.

One of the best ways to save is to put money aside every month when you receive money as a sole trader. This is something that you will hardly notice once you get into the habit of doing it. Having a separate bank account is also beneficial.

Complete Self Assessment Tax Return Early

It is always recommended that you complete your self assessment tax return as early as possible. Not only is this going to mean that it is not a rush later on, but it also means that you are going to have longer to save for your payments on account. You will know exactly what you will be paying and you are going to be able to put the money away so that you can make the instalments on time.

Reduce Payments on Account

It is important to remember that the amount you have to pay in tax is based on figures from the previous year. They are not always going to be an accurate reflection for your business. If you have been self-employed for a while, you know how earnings can fluctuate. So, if your profits are down from the previous business year, do not forget to reduce the payments on account. This is going to help you financially. Just make sure that you are always honest with tax payments. If you do end up overpaying in tax, do not worry. HMRC will refund you.