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Self-employed payments on account deadline – 2 tips to avoid overpaying

The ‘payments on account’ deadline is 31 July. We share strategies to help you save tax with HMRC.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

If you're self-employed, there's a good chance you spend a big chunk of the year dreading the tax bill due on 31 January. But you could risk being unprepared for a similar payment due on 31 July.

If your last tax bill was £1,000 or more and less than 80% of your income is taxed through PAYE, your self-assessment payments are normally split. On 31 January 2021 you'll have paid roughly half of your estimated tax bill for 2020/21. On 31 July, you'll need to pay the other half. These payments are known as 'payments on account'.

The summer holidays can be terrible timing for having to set aside a large lump sum to pay the bill. The pandemic also brings new pressures. You might be managing income fluctuations and failed to put money aside. Or you could be playing catch up if you set up a 'time to pay' plan last year.

To help ease the load, we offer two ploys to manage the effects of the pandemic.

This article isn't personal advice. Tax benefits depend on individual circumstances and tax rules can change. Tax is a complex subject so if you're not sure what to do you should ask for professional advice. You can't usually take money out of a pension until age 55 (rising to 57 in 2028).

Apply to reduce your payment on account

If you earned less in 2020/21 than a year earlier, it's not too late to apply to reduce your payment. You can do this through the Government Gateway or by completing a paper form and sending it to HMRC.

1. A tax-saving nudge?

Payment on account deadlines are a useful wake up that you need to hand over a large chunk of money to HMRC. And while you might not be able to do much to cut your tax bill for previous years, it's a reminder that you should be doing what you can to avoid paying over the odds for the current year. You could consider:

  • Holding investments in an ISA

    Holding investments in a Stocks and Shares ISA may make next year's tax bill less painful as you wouldn't have to pay UK income or capital gains tax on this money. Even better, details of investments held in an ISA don't have to be included in the tax return, so you'd save yourself a load of horrible admin next year. You can add up to £20,000 to ISAs every tax year.

    FIND OUT MORE ABOUT THE HL STOCKS AND SHARES ISA

  • Claiming extra pension tax relief

    If you pay tax at a higher rate then don't forget to include any pension contributions on next year's tax return. By doing so you could significantly reduce your tax bill for 2021/22. You'll find the correct section under tax reliefs, listed as 'payments to registered pension schemes where basic rate tax relief will be claimed by your pension provider'.

    The key here is to make sure you enter the 'gross' value of your contributions. This isn't just a total of all the money you paid in - it's the total of everything you paid in, plus the basic rate tax relief already added to your pension. This is a 25% increase to the net amount you paid in. For example, if you have paid £8,000 into personal pensions, the gross value is £10,000.

    MORE ON PENSIONS FOR THE SELF-EMPLOYED

    SEE OUR PENSION TAX RELIEF CALCULATOR

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2. Get a speedy refund

An estimated one in six people believe they've overpaid tax after making a mistake on their tax return. If you've paid too much tax in a particular tax year, you can claim a refund up to four years after the end of the tax year in question.

You might not get a refund if you have tax due within the next 35 days. Instead, the money will be deducted from the tax due. You can find out more about getting a refund on the government website.

Want to learn more about working for yourself? Get your self-employed and business owners guide to finances?

See our guide

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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