Self assessment payments on account, explained simply


 

Every January, thousands of self-employed people get a shock when they open their HMRC statement. They expected one tax bill, but HMRC wants half of next year's bill too. These are payments on account, and once you understand the logic behind them, they are straightforward to plan for. Here is what they are, who pays them, and how to avoid the January surprise.

What payments on account are

Payments on account are advance payments towards your next self assessment bill. HMRC assumes that next year's tax will be roughly the same as this year's, so it collects half of the current year's liability in advance, in two instalments. It is not an extra tax. It is the same tax, paid earlier. When your actual bill for the year is finalised, the payments on account are deducted from it, and you pay or are refunded the difference.

Think of it like this. If your self assessment bill for 2025/26 is 6,000 pounds, HMRC will ask for two payments on account of 3,000 pounds each towards 2026/27. When you file your 2026/27 return and the real bill turns out to be 7,000 pounds, the 6,000 you already paid is knocked off, leaving a balancing payment of 1,000 pounds.

Who has to pay them

You must make payments on account if your self assessment bill for the year is more than 1,000 pounds and less than 80 per cent of your total tax was collected through PAYE. In practice, that means most self-employed people, landlords and anyone with significant untaxed income. If your tax is mainly collected through an employer's payroll, you are usually outside the system. The first year you cross the threshold is the year the shock arrives, because nobody has warned you it is coming.

How they are calculated

Each payment on account is exactly 50 per cent of the previous year's self assessment liability, not including capital gains tax or student loan repayments in most cases. The two payments are due on 31 January and 31 July. The January deadline is the busy one: your first payment on account is due on the same day as the balancing payment for the year just ended.

The first-year cashflow shock

This is the part that catches people. In the first year you enter the system, you pay three things on 31 January: the balancing payment for the year just finished, plus the first payment on account towards next year. Using the earlier example, a 6,000 pound bill for 2025/26 means paying 6,000 pounds plus 3,000 pounds, a total of 9,000 pounds, all on the same January deadline. That is 150 per cent of your tax bill landing in one month. The second 3,000 pounds follows in July. From the second year onwards the rhythm feels normal, but that first January needs planning, ideally by setting aside tax monthly from the start.

The balancing payment

When you file your return for the year, HMRC compares your actual liability with the payments on account you made. If you paid too much, the excess is refunded or set against other tax you owe. If you paid too little, the shortfall is the balancing payment, due by the following 31 January. If your income is steady year to year, the balancing payment is small. If your income jumped, expect a larger one, and the next year's payments on account will jump too, since they are based on the higher figure.

Reducing payments on account when income falls

If you know your income will be lower next year, perhaps work has slowed or you have taken time off, you can apply to reduce your payments on account. You can do this online through your HMRC account or on the paper return, and the reduction takes effect immediately. But be careful: if you reduce them too far and the actual bill turns out higher, HMRC charges interest on the underpaid amount from the original due dates. Only reduce to a figure you have good reason to expect, and keep evidence of why you reduced, such as management accounts or a forecast. A provider of accounting outsourcing services can help you judge a realistic figure instead of guessing.

How to budget for them

The simplest approach is to treat tax as a monthly cost. Set aside 25 to 30 per cent of your profit into a separate savings account every month, before you touch the rest. When January and July arrive, the money is already there. Review the position each quarter against your actual profit so far, and adjust the set-aside rate if income is running ahead of or behind last year. And remember that payments on account interact with the rest of your obligations: student loan repayments and capital gains are handled alongside, so if your affairs include corporation tax and self assessment elements, keep the whole picture in one place rather than budgeting for each tax in isolation.


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