What Payments on Account are

If your Self-Assessment tax bill is above a set threshold and less than 80% of your tax was already deducted at source (as it would be under PAYE), HMRC usually requires you to make advance "Payments on Account" towards next year's tax bill, in addition to what you owe for the year just finished.

How the payments are structured

Each Payment on Account is normally half of your previous year's tax bill, due in two instalments: 31 January (alongside your balancing payment for the year just ended) and 31 July. A final "balancing payment" the following January then accounts for the difference between what you've paid on account and your actual tax bill for that year.

Why this catches people off guard

The first year you're required to make Payments on Account, the January bill can be considerably larger than expected — you're paying the full balance for the previous year plus the first 50% payment towards the year still in progress, effectively 150% of a typical year's tax bill in one payment. Budgeting for this in advance avoids a nasty surprise.

If your income falls

If you expect to earn significantly less in the current year than the previous one, you can apply to reduce your Payments on Account to better reflect your actual expected liability, avoiding paying (and later reclaiming) more than necessary. Reducing them too far when income doesn't actually fall as expected can trigger interest on the shortfall, so this should be a genuine, reasonable estimate rather than a guess.

Managing the cash flow

Many self-employed people set aside a percentage of each invoice or payment received throughout the year specifically for tax, rather than treating all income as available to spend — this smooths out the impact of both the annual balancing payment and the twice-yearly Payments on Account.

Key takeaways

  • Payments on Account are advance payments towards next year's tax bill, due January and July.
  • The first year can mean an unexpectedly large January bill — budget for it in advance.
  • You can apply to reduce them if you genuinely expect lower income, but be realistic to avoid interest charges.
  • Setting aside a percentage of income throughout the year smooths the cash flow impact.