How to reduce your payments on Account?

Generally speaking, if you are self-employed and working as a sole trader, you have a long period of time after the end of the tax year to pay your tax due.

The bill for the tax year that concluded on April 5, 2021 is due on the 31st of January in the following year, 2022.

That implies that the tax due on the job you were paid for in April 2020 will not be due until April 2022, a full 20 months after the work was completed. It might be extremely difficult to save the appropriate amount for your tax obligation throughout the year as a result of this.

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This is a problem that HMRC has an imperfect answer to, which is referred to as payments on account.

Only once you've submitted your first tax return, and if your tax debt exceeds £1000, will you be requested to begin making payments on account.

Payments on account are exactly what they sound like.

Payments on account can be thought of as a way of paying off your tax bill ahead of time.

The goal is to extend the amount of the upcoming year's tax obligation over a longer period of time. In addition, your payments are computed by taking a look at your prior tax bill and anticipating that you would earn the same amount the next year.

Consider the following illustration:

Your tax return for the tax year ending on April 6, 2022 (the tax year 2021/22), is due on the 31st of January in the following year. Along with paying your tax bill for the current tax year (2021/22) on that date, you'll also make your first advance payment on account for the following tax year (2021/22).

On the 31st of July 2022, you'll make a second payment on account towards your tax due for the years 2021/22.

Finally, by the 31st of January 2023, you'll be required to make a balanced payment. The cycle is then restarted with your first payment on account for the next tax year, which begins the process all over again.

Finding out how much money you owe is a difficult task.

• Log in to your online account if you have one.
• Select the option to 'see your most recent Self Assessment return' from the drop-down menu.
• Select 'View statements' from the drop-down menu.

In the following window, you will have the option of viewing your previous account payments as well as any payments you need to make toward your next tax obligation.

How to make your account payments on time and on budget

It is one of the most difficult aspects of the method HMRC calculates payments on account that it is dependent on the previous year's tax liability. As a result, if your income is reduced for any reason, you may find yourself overpaying.

If you anticipate this to occur—which is rather typical in the wake of Covid-19—there are two ways to request that HMRC lower the payments on account. The first is to submit a formal request to HMRC.

1. On the internet, by your own self-assessment

• Log in to your online account if you have one.
• To access your most recent Self Assessment return, select the appropriate option.
• Select the option to "Reduce payments on account."

2. Fill out the SA303 form completely.

The process of estimating your tax liability is not always straightforward. You may be charged interest by HMRC if you cut your payments on account because you expect your income to decline, but it turns out that your tax obligation is more than you anticipated.

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