Payment on account surprises many freelancers, and it can be a painful cost you weren't expecting.
Most well-prepared freelancers are aware they’ll need to pay income tax - and put 20-30% aside on each invoice.
However, something many don’t know about is “Payment on Account” - where you have to ALSO pay the next year’s tax in advance!
This can lead to your first year’s tax bill being 50% more than you expect.
In fact, payment on account is something which many freelancers are not aware of, until they complete their first self-assessment, and receive a surprising bill from HMRC.
If you’re a UK taxpayer who pays less than 80% of your income tax at source and your tax bill is over £1,000, you are likely to be told by HMRC to make ‘payments on account’.
Payments on account are payments towards your next year’s Income Tax.
This means, in your first year of trading, you’re liable for paying tax for the first year PLUS 50% of your estimated tax bill for the following year too.
This can catch some folk out, as they only put aside enough money to cover their estimated tax bill, not enough for the following year too!
Read our longer guide on Payment on Account to understand what it means, and how to put money aside to cover the cost.
Payment on account is relatively simple, but can feel complicated.
Working with an accountant can help, as they can help you estimate your tax bill, give you guidance on how much you should be putting away, and help you keep on top of what payments you’ll need to make, and when.
If you don’t have an accountant, make sure you’re keeping good paperwork, and complete your tax return as soon as possible, so you can confirm what tax bill you’ll have to pay, including your payment on account.
There are some really helpful guides from the ecosystem below.