Tax return: HMRC’s payments on account deadline is approaching – here is why it is unfair for the self-employed

Reminders from HMRC are arriving on the doormats and through the inboxes of the self-employed as millions face an extra tax return bill in the coming weeks when payments on account are due.

Much of the focus on self-assessments is around the 31 January tax return deadline when around 12 million people are usually expected to file a tax return for untaxed earnings from the previous financial year.

But HMRC doesn’t only want to get its hands on money owed from the previous tax year, it also has a way to ensure self-employed people like me are keeping up to date with their taxes through payments on account.

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It comes as data shows HMRC has charged £513 million in interest on the late payment of income tax since 2020.

This marks a busy period for the self-employed, especially if you are running your own limited company.

From this autumn, all company directors must verify their identity with Companies House in time for when they next need to file a confirmation statement but the changes are causing confusion.

Everyone wants to pay their fair share of tax, but there are reasons why the payments on account system can be unfair for the self-employed.

What are payments on account?

If you owe more than £1,000 in tax through self-assessment or haven’t already paid more than 80% through your tax code, HMRC adds payments on account to your bill.

This covers tax that you technically will have owed HMRC since the start of the current tax year in April.

One portion is added to your 31 January bill and the rest is owed by 31 July.

For example, if your tax bill for the 2023/2024 tax year was £3,000.

The total tax to pay by midnight on 31 January 2025 would have been £4,500.

This includes your £3,000 tax bill for the previous financial year and the first payment on account of £1,500 - based on your previous earnings - towards your 2024/2025 tax bill

You will then owe a second payment on account of £1,500 on 31 July 2025.

If your tax bill for 2024/2025 ends up higher, you will also need to make a ‘balancing payment’ by 31 January 2026 as well as your first payment on account for the next tax year.

If your total tax for the year is £3,000, the only payment you will need to make by 31 January 2026 is your first payment on account for the following tax year.

Many accountants, tax experts and HMRC argue that this helps the self-employed as if you sort your self-assessment early enough when the tax year ends in April, you can budget for these payments.

Technically, if you are organised then you are giving yourself from April to January to pay half your current tax year's bill with the first payments on account instalment and then have another six months until the end of July for the rest.

You can ask HMRC to lower your payments on account if you think your earnings will fall and you can get a refund if you pay too much. There is a risk that you may be charged interest if you underpay though.

HMRC can charge late payment penalties starting from 5% if a tax payment is 30 days late as well as 7.75% interest from the day after the payment is due, so it is important to pay.

"The payments on account scheme is designed to help people better manage the cost of their tax bill by splitting the amount into two payments and spreading the payments across the year," says Stevie Heafford, tax partner at accountancy firm HW Fisher.

"However, missing the deadline can be a costly mistake to make."

Paying tax is important but the payments on account system fails to reflect the realities of being self-employed.

What if you have unpredictable earnings?

Being self-employed brings plenty of flexibility but it also means my earnings can fluctuate.

As a freelance journalist, my income depends on the level of commissions I get each month and how generous editors are when it comes to shifts and rates.

So just because my latest tax return shows I have had a good year financially, that could all change in the next six months if commissions dry up.

It is like deciding to have an expensive meal at a restaurant once and then automatically being served and charged for the same thing the next time.

Invoicing issues for self-employed workers

Even if I know how much I am going to earn, another issue is actually getting paid.

There are plenty of publications that pay promptly, but in other cases I could be waiting weeks or months to have an invoice paid, or in some cases I may not ever get paid.

There are lots of professions with unpredictable income that this hits, especially if you have a sharp increase in earnings for one year.

“We work with a lot of barristers, and it can be a real issue for them,” says Scott-Taylor-Barr, principal adviser at Barnsdale Financial Management.

“They are being asked to pay taxes and then pre-pay tax on earnings they have billed for this year but may not see arriving in their bank accounts for years to come.”

Cashflow

The unpredictable earnings and invoicing issues can make it hard to start budgeting for payments on account, regardless of how early I start my tax return.

It therefore seems unfair to keep money locked up with HMRC for half a year when I could be using that for my own cashflow to pay bills or even myself.

Stephen Perkins, managing director of Yellow Brick Mortgages, highlights that you do not you pay tax in advance of earning other sorts of income, plus you don't get paid interest on the pre-payment either.

“In the first year of self-employment, you have to save twice the normal amount of tax to not be caught out by this,” he says.

“It shows a complete lack of trust from HMRC in the self-employed. Let them declare their income and then pay their tax bill with a deadline for payment.

“It is up to the individual to save their tax and plan for the bill, not for HMRC to force pre-payment. It is not a fair taxation policy and should be scrapped.”