What are ‘payments on account’ for sole trader income tax?

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Last Updated on 13 November 2023

I’m often asked about the idea that sole traders have to pay tax ‘in advance’.

That’s not quite true, but the ‘payment on account’ system means you might have to pay tax in advance of knowing precisely what the final bill for the year will be.

The key is to squirrel away a percentage of any client payments you receive so that you can cover a tax bill regardless when it arrives.

The amount you squirrel away will be dictated by the amount of income tax you’re likely to have to pay. Here’s a rough guide:

Guide to how much you put aside for tax. Basic rate (20%) tax payer - put aside 20%-25%; Higher rate (40%) tax payer put aside roughly 35%; More than £100K per year - put aside roughly 45% of what you're paid.
Remember: this is very rough. Don’t hold me to these figures!

I was prompted to write this by a rather good explanation by Which? of how ‘payments on account’ work for sole traders. You can read it here:

https://www.which.co.uk/news/article/dont-miss-this-self-employed-tax-payment-deadline-aHuQP8k6jWal

See also this article on simplybusiness.co.uk:

https://www.simplybusiness.co.uk/knowledge/articles/payment-on-account-what-it-is-and-how-to-pay/

NB: David Thomas Media Ltd is not responsible for the content of other sites nor any financial advice provided by them.

Posted on 22 July 2022

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