Self-employed tax deadline: how to avoid a 7.75% interest charge

If you're self-employed, don't forget you only have until midnight on 31 July to make the second 'payment on account' instalment. 

These advance payments to HMRC are made twice a year by eligible people who file their taxes using self-assessment – the first one was due on 31 January. Those who don't settle the bill on time face a penalty and a hefty interest charge of 7.75% on any money owed.

Here, Which? explains what taxpayers need to know about payments on account and the rules around missing deadlines.

What are payments on account?

If you have been self-employed for a full year, you may be asked to start paying tax in advance through the ‘payments on account’ arrangement. This includes Class 4 National Insurance, but not student loan repayments or Capital Gains Tax. 

It mainly applies to self-employed workers whose last self-assessment tax bill was more than £1,000, as long as you haven't already paid more than 80% of all the tax owed. For example, that could be through your tax code or because your bank has already deducted interest on your savings. 

The payments on account system also applies to those who have rental property income or other sources of untaxed income that exceed the threshold set by HMRC.

There are two payments a year, due by: 

• Midnight on 31 January
• Midnight on 31 July

Don't forget, 31 January is also the deadline for filing your self-assessment tax return and paying any outstanding balance from the previous financial year.

• Find out more: important tax return deadlines 2024

How much will I owe?

Each payment is half of what you paid in the last financial year, under the assumption that you'll owe roughly the same amount of tax in the following year. If you still owe tax after this has been paid, a further 'balancing payment' may be due by 31 January of the following year.

For example, let's say your bill for 2022-23 came to £5,000 and you paid by the deadline of 31 January 2024. On top of that amount, you'll have had to pay £2,500 for your first payment on account and the second instalment at the end July will be another £2,500.

By the time next January comes around, you'll just be paying £2,500 on account, since the previous year's tax bill will, in theory, already be covered.

If after totting up the actual amount of tax due for 2023-24, the two advance payments don't cover what you owe, you'll then need to make a further balancing payment on 31 January 2025. If you've paid too much tax, you'll be owed a refund. 

What happens if you don't pay on time?

There is no £100 fine for being late in July, but interest is charged on the amount owed. That currently stands at 7.75% because it's set at 2.5 percentage points above the Bank of England base rate. 

HMRC also imposes the following late payment penalties:

• 5% of any tax unpaid 30 days after the due date
• 5% of any tax unpaid five months after the due date
• 5% of any tax unpaid 11 months after the due date. 

Need help with your tax return?

Send your tax return to HMRC using the service provided by GoSimpleTax.

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Four tips for paying your tax bill

Whether you're new to the process or an old pro, here are some handy tips to help you get on top of payments on account and make the next instalment before the deadline.

1. It's possible to reduce the bill

Self-employed income can fluctuate from year to year, so if you know the amount of money made has definitely fallen for the period in question then you can ask HMRC to reduce your payments on account.

To apply, either fill out form SA303 and post it to the tax office or sign in to your online account using your Government Gateway login and visit the 'Reduce payments of account' section. 

You won't need to provide evidence that your tax bill will be lower. However, if you reduce your payments on account and it turns out that you owe a much higher figure, HMRC could charge you interest on the difference.

2. Ask for help if needed

The idea behind payments on account is to help taxpayers stay on top of their finances, breaking down the amount due by 31 January into two smaller payments spread throughout the year. However, the payment can come as a surprise to newly self-employed people, particularly in the first year. 

If you haven't budgeted for the bill and realise you can't pay by the deadline, you can ask HMRC for help spreading the payments with a Time to Pay arrangement. You can set up a plan on the gov.uk website. 

There's no 'standard' Time to Pay arrangement, so your payments and time period will be decided based on your needs. 

3. Budget carefully

Take a look at what you earned in the past three months and calculate the average. That should give you a rough idea of what you might expect to earn in the coming months. 

If you have multiple bank accounts and credit cards, then you might find it easier to budget via apps that use open banking technology. Open banking budgeting apps are useful for getting an overview of multiple bank accounts and credit cards in one place.

4. Plan how you will pay

There are several ways you can pay your bill, although HMRC doesn't accept personal credit cards and you can no longer pay your tax bill at the Post Office.

To get the payment to its destination on the same or next day, use Chaps or Faster Payment, online and telephone banking services, a debit card or business credit card. Paying by Bacs or by cheque in the post can take around three days, but cheques could take much longer to arrive if there are postal delays. 

If you'd prefer, you can also pay your bill via the free HMRC app. The app can also help with information such as your UTR number, National Insurance number, tax credit payments and any PAYE information.