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Payments on account are one of the most misunderstood parts of Self Assessment. Even experienced business owners and directors are often surprised by them, not because they are complicated, but because they tend to appear at exactly the wrong moment.
This article explains what payments on account are, why they exist, and what to do if they do not feel right for your situation.
A payment on account is an advance payment towards your next Self Assessment tax bill.
HMRC asks some taxpayers to pay part of next year’s tax early, based on what they owed in the previous year. It is not a penalty and it is not an extra tax. It is simply tax paid sooner than people expect.
If payments on account apply to you, they are usually due in two instalments:
Each instalment is normally 50% of the previous year’s tax bill.
HMRC uses payments on account to reduce the risk of people building up large tax bills that they cannot afford to pay in one go.
From HMRC’s perspective, it spreads the cost and improves cashflow for the Treasury. From a taxpayer’s perspective, it often feels like paying the same tax twice in one year.
That disconnect is where most frustration comes from.
You usually have to make payments on account if:
This commonly affects:
The issue is not the concept. It is the timing.
In January, people often expect to pay the tax owed for the previous year. What they do not always expect is that HMRC also asks for an advance payment towards the current year at the same time.
This means the January bill can include:
That can make the bill feel far larger than anticipated, even though it is not extra tax overall.
This is where payments on account often stop making sense.
If your income has reduced, become irregular, or stopped altogether, your payments on account may be higher than necessary. In some cases, they can be reduced.
However, this needs to be done carefully. Reducing payments too far can result in interest being charged later if the reduction was not justified.
This is an area where a short review can prevent unnecessary cashflow pressure without creating problems further down the line.
If payments on account apply and you do nothing, HMRC will assume they are correct.
If you do not pay them by the deadlines, interest will be charged. If they remain unpaid, penalties may follow.
Ignoring payments on account does not make them go away. It usually just makes them more expensive.
When you submit your next Self Assessment return, HMRC looks at how much tax you actually owe.
If you paid too much through payments on account, you will receive a refund or credit.
If you paid too little, you will need to pay the difference.
Payments on account are adjusted automatically once the next return is filed. They are not permanent.
Payments on account are frustrating, but they are not random and they are not designed to catch people out. They simply assume that next year will look similar to last year.
If that assumption no longer holds true, it is important to review your position rather than react emotionally to the bill.
Understanding how payments on account work makes them far easier to manage and far less stressful.
If you would like help reviewing your payments on account or understanding whether they are still appropriate, we are always happy to help.