Payments on account can catch you out if you submit a UK Self Assessment tax return and owe more tax than expected. They are advance payments towards your next tax bill, and they can create a nasty shock if you only budget for the tax you already owe.
This episode is for self-employed people, landlords, company directors, shareholders and anyone with untaxed income who needs to understand how payments on account work. We explain what they are, when they apply, how they are calculated, when they are paid, and what you can do if your future tax bill is likely to be lower.
About this episode
Payments on account are not always properly explained, but they are an important part of the UK Self Assessment system. If money reaches your pocket without tax being deducted first, you may need to complete a tax return and pay what you owe directly to HMRC.
In this episode, we explain the basic framework of Self Assessment, why payments on account exist, how HMRC uses last year’s tax bill to estimate the next one, and why setting money aside throughout the year matters.
If you are self-employed and want a wider foundation before looking at payments, our episode on Tax basics for self employed: What You Need to Know is a useful starting point.
Why payments on account matter
Payments on account matter because they affect your cash flow. You may think your January tax bill is just the tax for the year you have already completed. However, if payments on account apply, you may also need to pay an advance amount towards the next tax year.
That means January can feel heavier than expected. You may have your balancing payment for the previous tax year, plus the first payment on account for the next tax year. The second payment on account is normally due later in July.
This is why tax planning is not just about completing a return. It is also about saving regularly, understanding your likely tax bill, and avoiding surprises before the deadline arrives.
Key points from this episode
What are payments on account?
Payments on account are advance payments towards your next Self Assessment tax bill. HMRC uses your previous year’s tax bill as a guide and asks you to pay towards the next year before that return is completed.
They are designed to spread the cost of tax into instalments. However, they can still feel like a shock if you are not expecting them.
They are especially relevant where your income has not already had tax deducted at source. This can include self-employment income, rental income, dividends and other untaxed income.
Who needs to watch out for payments on account?
You should pay attention to payments on account if you complete a Self Assessment tax return and your tax bill is above the relevant threshold.
This often affects self-employed people, landlords, directors and shareholders who receive income that is not fully taxed before it reaches them.
PAYE employees may have most of their tax collected through payroll. However, once income falls outside that system, more responsibility sits with you to calculate, report and pay the right amount on time.
How payments on account are calculated
Payments on account are usually based on your previous year’s Self Assessment tax bill. Each payment is normally half of that previous bill.
For example, if your relevant tax bill was £4,000, HMRC may ask for two payments on account of £2,000 each. The first is normally due by 31 January and the second by 31 July.
If you have already made payments on account in the previous year, those payments are offset against your final tax bill. If they do not cover the total amount owed, the remaining amount is called a balancing payment.
Why the first year can feel painful
The first time payments on account apply, the amount due can feel especially heavy. That is because you may need to pay the tax you owe for the year just ended, plus the first payment towards the next tax year.
This is where many taxpayers are caught out. They budget for one tax bill, but the system asks for an advance payment as well.
Understanding this early gives you time to prepare, save and avoid a last-minute scramble.
Can you reduce payments on account?
You may be able to reduce your payments on account if you expect your next tax bill to be lower than last year’s.
That might happen if your profits fall, your income changes, your allowances increase, or your tax position changes. However, the reduction should be realistic and based on a sensible estimate.
If you reduce payments too much and your final tax bill is higher than expected, HMRC may charge interest on the difference. Therefore, reducing payments on account needs care.
How to prepare for payments on account
The best way to deal with payments on account is to plan ahead. Every time you raise an invoice, receive rental income, take dividends or earn untaxed income, set aside a proportion for tax.
A separate savings account can help. That way, the money for tax is not mixed in with everyday spending or business cash flow.
You can also estimate your likely tax bill during the year. This helps you avoid surprises and gives you time to adjust your savings before the payment deadline.
What to check before the deadline
- Do you need to submit a Self Assessment tax return?
- Was your previous tax bill high enough to trigger payments on account?
- How much tax have you already paid through PAYE or other deductions?
- Do you have untaxed income from self-employment, rent, dividends or other sources?
- Are your profits likely to be higher or lower this year?
- Do you need to reduce your payments on account?
- Have you saved enough for the January and July deadlines?
- Have you allowed for any balancing payment?
If a missed deadline leads to penalties or interest, our episode on HMRC Reasonable Excuse: How to Appeal a Tax Penalty Successfully explains what to consider when appealing a tax penalty.
FAQs about payments on account
What are payments on account?
Payments on account are advance payments towards your next Self Assessment tax bill. They are usually based on the previous year’s tax bill and paid in two instalments.
When are payments on account due?
Payments on account are normally due by 31 January and 31 July. The January deadline may also include any balancing payment for the previous tax year.
Can I reduce payments on account?
You can ask HMRC to reduce them if you expect your next tax bill to be lower. However, if you reduce them too far, interest may be charged on the underpaid amount.
Why did my January Self Assessment bill look higher than expected?
It may include more than one amount: the tax still owed for the previous year, plus the first payment on account towards the next tax year.
Episode Timecodes
- 00:00 – Why payments on account can create a tax shock
- 00:40 – Introducing payments on account
- 01:04 – What we cover: calculation, reduction and payment dates
- 01:24 – How the UK Self Assessment system works
- 02:29 – Rishi and Boris example: profits and tax bills
- 03:29 – Self Assessment deadlines and first payments
- 03:57 – When payments on account are triggered
- 04:44 – January and July payment dates
- 05:44 – Existing taxpayers and payments already made
- 08:20 – Why HMRC assumes next year will follow last year
- 09:05 – Reducing payments on account
- 10:27 – Saving ahead for your tax bill
- 12:16 – Final reminder to watch your tax bill
Related episodes
- Tax basics for self employed: What You Need to Know
- Tax and Your Self-Employed Business: Sole Trader or Limited Company?
- HMRC’s Invisible Crackdown: What Business Owners Need to Know
Key takeaway
Payments on account explained simply are advance payments towards your next tax bill. They can help spread tax across the year, but they can also surprise you if you are not prepared.
The practical answer is to understand when they apply, estimate your tax during the year, save regularly, and only reduce payments on account when you have a sound reason to do so.
Plan it, Do it, Profit.
“Payments on account are not extra tax, but they can feel like extra tax if you have not planned for them.”
Further Support
The I Hate Numbers podcast helps business owners understand accounting, tax, finance, profit, cash flow, and business planning in a practical way. We simplify financial topics so you can make better decisions and feel more confident with your numbers.
You can also watch more practical finance and tax support on the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.
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