What is payment on account?

Payment on account is HMRC’s way of collecting Self Assessment tax in advance. Instead of paying your whole bill once a year, you make two payments towards next year’s tax, based on this year’s bill. Each one is half of your previous year’s tax (including Class 4 National Insurance if you are self-employed). When you file your actual return, the estimate is corrected by a balancing payment or refund. It catches a lot of people out in their first year, because the January bill effectively includes one and a half years of tax at once.

It is designed to stop self-employed taxpayers being a full year behind employees, whose tax is deducted from each payslip through PAYE as they earn. Payment on account moves you onto a roughly current footing by collecting tax for the coming year as you go. It is not an extra tax, it is the same tax paid earlier. The downside is the first year, when you pay last year’s bill and the first instalment of next year’s together.

Each payment on account is 50% of your previous year’s total Self Assessment tax. So if last year’s bill was £3,000, you make two payments of £1,500, one by 31 January and one by 31 July. These go towards the current year. When you file that year’s return, you pay any extra (a balancing payment) or reclaim any overpayment, and the cycle starts again based on the new figure.

Not always. You are exempt if your last Self Assessment bill was under £1,000, or if more than 80% of your tax was already collected at source (for example through PAYE on a salary). If neither applies, payments on account are compulsory. They are most common for sole traders and landlords whose income is not taxed at source. We work out whether they apply to you and make sure the January figure is no surprise.

Yes, if you genuinely expect to earn less than last year, you can apply to reduce them through your HMRC account or form SA303. Be careful though: if you reduce them too much and end up owing more, HMRC charges interest on the difference. It is a useful tool when your income has really fallen, but it should be based on a realistic estimate, not wishful thinking. We can advise on a sensible level so you neither overpay nor get caught with interest.

The first payment on account is due by 31 January, at the same time as any balancing payment for the previous year. The second is due by 31 July. So the January deadline can be a big one in your first year, because it combines last year’s balance with the first instalment of the new year. Knowing the figure early lets you set the money aside, which is part of what we plan with our clients.