What are payments on account?

Payments on account are advance payments towards your next Self Assessment tax bill.

They apply to most sole traders and individuals who complete a Self Assessment tax return.

Many people are surprised by payments on account because they can make the first large tax bill much higher than expected.

Full guidance from HMRC is available here:
https://www.gov.uk/understand-self-assessment-bill/payments-on-account

When do payments on account apply?

You usually need to make payments on account if:

• Your Self Assessment tax bill is more than £1,000

• Less than 80 percent of your tax has been collected at source, such as through PAYE

They mainly apply to sole traders and people with untaxed income, such as rental income or dividends.

They do not apply to Corporation Tax.

How do payments on account work?

Each year, you normally make two advance payments towards the following tax year.

These are due:

• 31 January

• 31 July

Each payment is usually 50 percent of your previous year’s Income Tax and Class 4 National Insurance bill.

Class 2 National Insurance is not included in payments on account.

A simple example

Imagine your first year as a sole trader results in a tax bill of £4,000.

On 31 January, you would pay:

• £4,000 for the tax year that has ended

• £2,000 as your first payment on account for the next tax year

Total due on 31 January would be £6,000.

Then on 31 July, you would pay:

• The second payment on account of £2,000

If your next tax bill turns out to be higher or lower than expected, the difference is adjusted the following January.

Why this catches people out

In your first year of trading, you only pay the tax for that year.

In your second year, you pay:

• The previous year’s tax

• Plus advance payments for the current year

This can make the January payment feel much larger than expected.

Can payments on account be reduced?

If you expect your profits to be lower than the previous year, you can apply to reduce your payments on account.

However, if you reduce them too far and underpay, HMRC may charge interest on the shortfall.

Key dates to remember

For most individuals:

• 31 January is the deadline to file your tax return and pay your balancing payment and first payment on account

• 31 July is the deadline for the second payment on account

Missing these deadlines can result in penalties and interest.