Amongst the many joys (or curses?) or self employed life is the fact that your income can fluctuate wildly from year to year. And if you find yourself in a position where your income drops considerably one year vs the previous, you might benefit from reducing your payment on account at tax return time. In this guide, we look at what the payment on account is, why you might want to reduce it and how to go about it.
What is a payment on account?
Those of you familiar with the tax return already and several years in will be well versed with payments on account. But if you’re new to freelancing and you’re filing your first or second tax return, the payment on account might have been a surprise or something you don’t fully understand yet. So in brief, here’s what it is.
In short, payments on account are payments you make in advance against your tax bill.
They’re paid twice a year. The first is paid on 31st January (so lands on the same date your previous year’s tax bill is due). The second is at the end of July.
When paying tax by self assessment, your tax bill for any given year isn’t finalised until you complete your return and your tax bill isn’t due until January 31st the following year. In other words, you don’t have to pay your full tax bill until over 9 months after the tax year ends. By making a payment on account twice during the year, you make an advanced contribution towards that bill.
How is the payment on account calculated?
HMRC calculates what your payments on account should be based on your previous year’s earnings.
That’s fine if your earnings are relatively consistent or slowly increasing. But if you find yourself in a position where your earnings drop significantly one year, you will potentially find yourself with proportionally large (and difficult to pay) payments on account.
It’s in these cases that you may wish to request a reduction in your payment on account.
Can I reduce my payment on account?
Yes. That’s the short answer. HMRC understands that incomes can fluctuate and they have processes in place to help people request a reduction in the amount due if incomes have dropped.
How do I reduce my payment on account?
HMRC has made this a relatively straightforward process. You can get access to both the online form and postal form (Form SA303) here.
You’ll need to complete the form explaining why you want to reduce your payments on account and to what level you wish to reduce them.
It’s a simple process.
Something to consider
Make sure you’re confident in your figures when you request a reduction. If you are found to have deliberately abused the system a penalty can be applied. And you may find yourself owing interest!
But all in all, reducing your payment on account when you have genuine reason to believe your earnings will be lower is a relatively simple process.