Self assessment payments on account

If you are self-employed (as a sole trader or in partnership) you will normally make two payments on account of your self assessment tax liability at the end of January and July each year.

Normally, these payments on account are based on your total self assessment dues for the previous tax year. So, for 2015-16, you will be making payments on account at the end of January and July 2016, based on your total liabilities for 2014-15.

As long as your taxable income does not change significantly, year on year, this system will ensure that your tax liabilities are settled by the on account payments you make (plus or minus small differences if your income varies slightly).

But what happens if you know that your income for 2015-16 is going to be much lower than 2014-15? In this case any payments on account based on the previous tax year’s income will likely result in an overpayment of tax.

If your income is likely to be lower in 2015-16 you should elect to reduce the payments on accounts that you make January and July next year. Your advisor should be able to estimate the amount due, and the necessary reduction in your payments next year. In this way you can avoid overpayments of tax and minimise the cash flow impact on your business cash flow or savings.

If the opposite applies, your taxable income is likely to be more in 2015-16, there is no obligation to offer a higher payment on account. However, you will need to reserve funds to cover any underpayment for this year which will be payable 31 January 2017.