Tax & admin · 1 December 2021

Everything You Need To Know About Tax Payment On Account

tax payment on account

Unlike people in traditional employment, self-employed people in the United Kingdom are responsible for management and paying of their own taxation. This typically means that they have to make a number of tax payments throughout the year, as well as complete a Self-Assessment Tax Return each April. One such payment is Tax Payment on Account (TPA). TPA is an estimate of how much a person will need to pay HMRC for the first half of the next tax year. The amount payable depends on income and allowable deductions from previous years’ tax returns.

Failure to pay the correct taxes could result in fines and other serious penalties so it is important to know what you owe and when you owe it. To help make this process easier, here is everything you need to know about tax payment on account.

What is Tax Payment On Account?

Tax payment on account is an estimate of how much you need to pay HMRC for the first half of the next tax year. This amount depends on income and allowable deductions from the previous years’ self-assessment returns, so it is important to keep all of your financial records in good order so you can make the correct calculations.

Tax payment on account is usually paid in two instalments, at 50% each. The first payment is taken at the end of January and must be received by HMRC before 31st January (unless you are paying via direct debit or online). You can pay this immediately after you complete your Self-Assessment Tax Return for the previous tax year – usually during October through to December. The second instalment should be paid on 30th April, which means that it’s important not to wait until the last minute.

Who pays Tax Payment On Account?

Tax payment on account is payable by people who are self-employed, however, there are some notable exceptions. For example, charities do not have to make a TPA but they may wish to do so as an advance against any future liability relating to the same year. If you’re a director of your own limited company, TPA is payable by you as an individual even if it’s paid through your business account. It is usually for self-employed people and small business owners to keep their personal finances separate from their business accounts because it makes things like paying taxes easier, so this is something to consider if you don’t have a business account.

Why does Tax Payment On Account exist?

Tax payment on account was introduced in 1990 for self-employed people. It was designed to help individuals and companies spread the cost of tax payments throughout the year rather than waiting until 31st January each year when all taxes are due at once.

Since that time changes have been made which mean that HMRC will automatically issue an instalment reminder if you are overpaying your current tax bill. This means it’s even more important to keep track of how much TPA you owe so that you don’t end up paying too little or too much.

How are National Insurance contributions made?

National Insurance Contributions are directly linked to tax payments on account and must be paid by everyone above the minimum earnings threshold. You can pay them separately to your TPA or you can set up a direct debit for each, although there is usually no need to do this as HMRC will apply NI contributions when they work out how much TPA needs to be paid.

HMRC tax returns

How can you pay Tax Payment On Account?

There are a number of options when paying tax payment on account: online via Self Assessment Online; by direct debit; personal credit card, cheque or postal order payable to ‘HM Revenue & Customs’; business credit card (there may be service charges for this so check with your bank); or by BACS transfer.

If you are paying online, HMRC will send you an email that contains a link to take you directly to the payment page once they have assessed how much tax needs to be paid and when it’s due. Make sure that you do not ignore these emails as if the deadline is missed then penalties could apply.

If paying via direct debit, remember that there must be enough money in your account on 31st January (or before) for both instalments of TPA and National Insurance Contributions – if these aren’t available then payments may bounce and you could incur additional charges from your bank or building society.

How can you reduce your self-employed tax bill?

One way to reduce your self-employed tax bill is by claiming all allowable expenses related to your business/self-employment activities. There are many different types of business expenses that can be claimed back such as car fuel, office equipment and home internet access.

These should all be listed on your Self-Assessment Tax Return but you need to make sure there is enough evidence (receipts, invoices etc) for everything which has been paid out so it’s clear how the money was spent and why you needed those things for work. This evidence will help if HMRC request any further information about your business to ensure that deductions are legitimate.

What happens if you overpay your tax bill?

If you have paid your TPA for this year and then find that you have paid too much, then you will be able to make an overpayment claim either by direct debit or online once you become established with Self Assessment Online. Overpayments will be repaid at the end of the tax year when HMRC work out how much TPA has been paid throughout the year.

What happens if you underpay your tax?

If you realise that there isn’t enough money in your account on 31st January (or before) to pay both instalments of TPA together with National Insurance Contributions then contact HMRC as soon as possible so they can help guide you through what options are available. If you don’t do this, then you could face potential penalties. These may include an additional fine of up to 100% of the tax due, depending on how much you underpaid.

If you are due a refund from previous years, then this can be used against future payments but if HMRC believes that there has been an error in how much TPA was previously calculated for you, they will ask for it back first before applying another payment towards your current year’s tax liability. 

tax penalty letter

How do you fill in your Self-Assessment tax forms?

If your Self-Assessment Tax Return covers both tax periods, it is important that all calculations for TPA and NI Contributions are made correctly so make sure these amounts are included alongside any other figures which need to be declared. The online form has a section called ‘tax payments this period’ where information about how much TPA should be paid can easily be entered.

There should also be an option available if your direct debit arrangements have changed since last year’s return was completed. It may also require details about the bank accounts you will be using if you decide to pay online or via BACS transfer rather than via direct debit.

How do you register as self-employed with HMRC?

Registration as self-employed with HMRC is required by everyone who works for themselves and this will be done automatically by the tax office if you are due to pay Self-Assessment. However, there may also need to be some checks carried out so it’s important that any changes in your situation which have taken place since last year are reported promptly.

Once registered, information about your business activity and earnings can easily be accessed online through a secure account called Your Business Account (YBA). This is available for both sole traders/self-employed individuals and limited companies who wish to check their accounts. It keeps track of payments made throughout the financial year including TPA instalments and National Insurance Contributions along with all expenses claimed back against tax bills. Payments can also be made through this account if you wish.

Why is financial transparency so important?