Self Assessment payments on account
Payments on account can come as a real shock when you first encounter them.
You may file your Self Assessment tax return, expect to pay the tax for the year just ended, and then discover that HMRC also wants an advance payment towards next year’s tax bill.
That can feel frustrating, especially if your income is irregular or your cashflow is already under pressure.
This guide explains how payments on account work, who has to make them, when they are due, and what you can do to avoid unpleasant surprises.
What are payments on account?
Payments on account are advance payments towards your next Self Assessment tax bill.
They are usually based on your previous year’s tax bill and are designed to spread the cost of tax across the year.
Each payment is normally half of the previous year’s relevant tax bill.
For example, if your previous Self Assessment bill was £4,000, HMRC may ask you to make two payments on account of £2,000 each towards the following tax year.
Who has to make payments on account?
You may need to make payments on account if you submit a Self Assessment tax return and your tax bill is more than £1,000.
Payments on account generally cover Income Tax and Class 4 National Insurance, where relevant.
They do not usually include Capital Gains Tax or student loan repayments. These are normally dealt with through the balancing payment instead.
Who does not have to make payments on account?
You usually do not have to make payments on account if:
- Your previous Self Assessment tax bill was less than £1,000
- More than 80% of the tax you owed was already collected outside Self Assessment, for example through PAYE
This means that someone with most of their tax collected through employment may not need to make payments on account, even if they still have a Self Assessment bill to pay.
When are payments on account due?
Payments on account are normally due in two instalments:
- 31 January: first payment on account
- 31 July: second payment on account
The 31 January deadline is also the deadline for:
- Filing your online tax return
- Paying any balancing payment for the previous tax year
- Paying the first payment on account for the current tax year
This is why January can feel particularly expensive.
What is a balancing payment?
When your tax return is submitted, HMRC compares your actual tax bill with the payments on account you have already made.
If your payments on account were not enough, you will have a balancing payment to make by 31 January.
If your payments on account were too high, you may be due a refund or you may be able to use the overpayment against your next tax bill.
Why payments on account can be helpful
If your income is fairly consistent from year to year, payments on account can work quite well.
Instead of paying the whole tax bill in one large amount, you make two payments during the year and then settle any small difference the following January.
For steady income, this can make tax payments more predictable.
Why payments on account can cause problems
Payments on account are based on the previous year’s tax bill.
That means they can be difficult if your income changes.
If your income falls, HMRC may still ask you to make payments based on a higher previous year.
If your income rises, your payments on account may not be enough, leaving you with a larger balancing payment the following January.
This can be especially challenging for:
- Sole traders
- Freelancers
- Consultants
- Landlords
- Company directors taking dividends
- People with irregular income
The first year can feel especially painful
Payments on account often feel worst when they apply for the first time.
In January, you may need to pay:
- The full tax bill for the previous tax year
- The first payment on account for the current tax year
That can mean paying 150% of your previous year’s tax bill in one go.
For example, if your tax bill is £4,000, your January payment could be:
- £4,000 balancing payment for the previous year
- £2,000 first payment on account for the current year
Total due: £6,000
The second payment on account would then usually be due by 31 July.
Can payments on account be reduced?
Yes. If you know your tax bill for the next year will be lower, you can apply to reduce your payments on account.
You may be able to do this through your HMRC online account, or by using form SA303.
This can be helpful if, for example:
- Your self-employment income has fallen
- Your rental income has reduced
- You have stopped a source of income
- More of your tax is now collected through PAYE
- Your taxable profits are expected to be lower
Be careful when reducing payments
Reducing payments on account can help cashflow, but it should be done carefully.
If you reduce them too far and your final tax bill is higher than expected, HMRC may charge interest on the underpaid amount.
The interest is usually calculated from the original payment due dates.
For this reason, it is better to make a realistic estimate rather than reduce the payments simply because the January or July amount feels uncomfortable.
How to avoid surprises
There are three practical ways to reduce the stress caused by payments on account.
Keep track of your income
Do not wait until January to find out how the year has gone.
Keeping your records up to date during the year helps you understand your likely tax position earlier.
This is especially useful if your income fluctuates or if you have flexibility over dividend timing.
Save regularly for your tax bill
If you have untaxed income, it is sensible to set aside money regularly for tax.
This does not need to be perfect, but building a tax reserve through the year is much healthier for cashflow than trying to find a large lump sum at short notice.
HMRC also allows taxpayers to make regular payments towards their next Self Assessment bill through a Budget Payment Plan.
Prepare your tax return early
The sooner you prepare your tax return after the 5 April tax year end, the more time you have to plan.
Filing early does not mean paying early.
It simply gives you better information.
If your tax bill is lower than expected, filing before 31 July may help reduce the second payment on account.
If your tax bill is higher than expected, filing early gives you more time to save before the January deadline.
When to ask for advice
Payments on account are manageable once you understand how they work, but they can create real cashflow pressure when income changes or when they apply for the first time.
If you are unsure whether your payments on account are correct, or whether you should apply to reduce them, it is worth speaking to your accountant before making changes.
CooperFaure supports individuals, sole traders, landlords, company directors and business owners with Self Assessment, personal tax planning and tax return preparation.