Payments on account explained

Many people are surprised when their first Self Assessment bill includes “payments on account” on top of the tax they expected. Understanding what these are—and how they’re calculated—can help you plan ahead and avoid cash flow shocks.

Payments on account are advance payments towards your next year’s tax bill. HMRC may ask you to make them if a significant amount of tax is due under Self Assessment that isn’t collected through PAYE. The idea is that you effectively pay your tax in instalments, rather than all at once after the year has ended.

Typically, if your Self Assessment bill for a tax year is over a certain threshold (excluding capital gains and student loan repayments), HMRC will ask you to make two payments on account. Each is normally 50% of the previous year’s bill. These are usually due on:

• 31 January (first payment on account for the current year), and

• 31 July (second payment on account for the current year).

When you eventually file your return for that current year, HMRC compares what you owe with what you’ve already paid on account. If you’ve overpaid, you’ll get a refund or credit. If you’ve underpaid, there will be a balancing payment, due by 31 January following the end of that tax year.

In some cases, it’s possible to reduce payments on account—known as “claiming to reduce”—if you have a genuine reason to believe your income and resulting tax will be lower in the current year. However, reducing them too aggressively can lead to interest charges if the reduction turns out to be unjustified.

We advise clients on:

• Whether payments on account apply to them,

• How much they are likely to be, and

• Whether a reduction is sensible based on future income expectations.

With the right planning, payments on account become part of a predictable routine rather than an unwelcome surprise.