Payments on Account - Understand Your Self Assessment Tax Bill

‍Payments on account are advance payments you make towards your annual tax bill if you file a Self Assessment tax return in the UK. You have to make 2 payments on account every year if:

• Your last Self Assessment tax bill was more than £1,000
• You paid less than 80% of the previous year’s tax owed, such as through your tax code or interest deductions by your bank

Payments on account help spread the cost of your tax bill over the year rather than paying it all in one go. They are calculated based on your previous year's tax bill and are split into two equal installments, typically due on 31st January and 31st July each year. The idea behind Payments on Account is to prevent you from facing a large, unexpected tax bill at the end of the year.

Essentially, Payments on Account serve as a way for HMRC to collect tax in advance, based on the assumption that your income and tax liability will be similar to the previous year.

Here's how it works:

1. Estimate Your Tax Bill: After you submit your tax return, HMRC estimates how much tax you'll owe for the next tax year.
2. Split Payments: They divide this estimated amount into two, and you make two equal Payments on Account. The first one is due by January 31, and the second one is due by July 31.
3. Adjustment Later: When you complete your tax return for the current year, you may find that your actual tax bill is different from the estimate. If you've paid too much

Payments on Account help you manage your tax payments throughout the year, but it's essential to keep track of your income and expenses to avoid surprises when settling your final tax bill.

Payments on account include Class 4 National Insurance Contributions where applicable, but do not include student loan repayments or Capital Gains Tax and you’ll pay those in your ‘balancing payment’.

Understanding Payments on Account is crucial for managing your finances and ensuring you don’t face unexpected tax bills. If you don’t plan for these payments, you might struggle with cash flow, especially if you’re self-employed or rely on fluctuating income. By knowing how much you’ll need to pay and when, you can budget more effectively, avoid penalties for late payments, and stay in control of your tax obligations.

Not everyone is required to make Payments on Account. Here’s who typically needs to:

• Self-Employed Individuals: If you’re self-employed, you’re likely required to make Payments on Account since you don’t have tax deducted at source, like employees do.
• Landlords: If you earn rental income from property, you may also need to make these advance payments to cover the tax on that income.
• Investors: Those who receive significant income from dividends, savings interest, or other investments might need to make Payments on Account if their tax bill exceeds a certain amount.
• Others with Untaxed Income: If you have income from sources that aren’t taxed at source, such as income from abroad, pensions, or part-time work, you might be required to make Payments on Account.

However, you won’t need to make Payments on Account if your last Self Assessment tax bill was less than £1,000, or if more than 80% of your tax is collected at source (e.g., through PAYE).

Each payment is half of your previous year's tax bill. The payment on 31st January is the first advance payment you'll make for the current financial year, and the remaining half will be paid off on 31st July. Here’s how they are calculated:

This can be confusing, so we've included an example below to explain how payments on account works: 

John is a self-employed repairman. For the 2023/24 tax year, he owes HMRC £2,000 in taxes, which he needs to pay by 31st January 2025. Along with this payment, John must also make Payments on Account for the 2024/25 tax year. Since Payments on Account are based on 50% of the previous year’s tax bill, each installment for John will be £1,000 (half of the £2,000 he owed for 2023/24).

So, on 31st January 2025, John will need to pay a total of £3,000:

• £2,000 for his 2023/24 tax bill.
• £1,000 as the first Payment on Account for 2024/25.

The second Payment on Account of £1,000 will be due by 31st July 2025.

When John submits his tax return for the 2024/25 tax year, he finds that his total tax bill is £2,500. Since he has already paid £2,000 through his Payments on Account, he only needs to pay the remaining £500 by 31st January 2026. This is known as the balancing payment.

For the 2025/26 tax year, John will again need to make Payments on Account. Since his tax bill for 2024/25 was £2,500, each of his Payments on Account for 2025/26 will be £1,250 (half of £2,500). These payments will be due on 31st January 2026 and 31st July 2026.

Key Dates for Payments on Account (31st January and 31st July)

Payments on Account are due twice a year. The first payment is due by 31st January, and the second payment is due by 31st July. For example, on January 31, 2025, and July 31, 2025, you might need to make payments on account for the upcoming tax year (2024/25) even though the tax return is due on January 31, 2026. Any excess payment or difference will be refunded by HMRC through cheque, bank transfer, or deduction from the next tax bill.

When you complete your tax return, you might find that your current year’s tax bill is higher than what you had paid through Payments on Account. This means you will owe additional tax beyond what you have already paid. In this situation, you will need to make a "balancing payment" to HMRC.

For example, if you made Payments on Account totaling £2,000 for your 2023/24 tax year, but your actual tax liability is £2,500 when you complete your return, you will need to make a balancing payment of £500 to HMRC by 31st January 2025.

Balancing payments also cover any additional tax owed, such as Capital Gains Tax and student loans, which are not included in your Payments on Account.

Essentially, your Self Assessment tax bill includes the balancing payment for the previous year and Payments on Account towards the upcoming year's tax bill.

When Are Balancing Payments Due?

Balancing payments are typically due by 31st January following the end of the tax year. For example, for the 2023/24 tax year, your balancing payment will be due by 31st January 2025.

To pay your Payments on Account, you have several methods to choose from, depending on how quickly you need to make the payment. The table below shows how long you must pay using each method to avoid late payment penalties:

If your payment deadline falls on a weekend or bank holiday, make sure to submit your payment by the last working day before the deadline if you’re using methods other than Faster Payments or debit/credit cards. This ensures your payment reaches HMRC on time and avoids any late fees.

According to HMRC, "the first late payment penalty is 5% of any tax unpaid after 30 days". 

"Where a balancing payment or payment on account is still unpaid more than 30 days from the due date for that year's balancing payment, a late payment penalty automatically arises equal to 5% of the tax unpaid at that date."

If you expect your income to be lower in the current tax year compared to the previous one, you might be able to reduce your Payments on Account. To do this, you need to apply to HMRC to lower the payments. You can do this by submitting an estimate of your expected income and tax liability for the current year. This estimate should be based on your new, lower income and adjusted expenses.

You can make an application to have your self assessment payment on account reduced using following methods:

1. Online:

• Sign in to your online account.
• View your latest Self Assessment return
• Select ‘Reduce payments on account’

2. by Post:

Submit Form SA303 to your tax office

If you overpay or underpay:

If you overpay, HMRC will send you a refund.

If you underpay, HMRC may charge interest and impose penalties for underpayments, so it's best to consult accountants for self-employed before you apply to reduce your payments on account.

Claiming Payment on Account Refund

If you’ve overpaid your tax, you can claim a refund on your Payments on Account.

As a Self Assessment taxpayer, you will claim this refund when you file your next tax return. Once you submit your tax return, HMRC will review it and notify you if you have overpaid.

You can then choose how you’d like to receive your refund. Options include receiving a cheque or a bank transfer. Alternatively, you can apply the refund to your next Payments on Account.

Payment on Account Best Practices

Check your payments on account well in advance of any deadlines:

Conducting regular checks ahead of deadlines will leave you with plenty of time to contact HMRC, in the event that there are aspects you need to clarify.

You can easily do a check online-just sign into your Government Gateway account, and select the option to view your latest Self Assessment return.

This will show payments on accounts that you've made, along with payments you need to make for your next tax bill. 

Get into the habit of saving for your taxes:

If you're newly self-employed, you'll need to get into the habit of setting money aside for your tax bill.

Unsure about how much you need to save? You can use HMRC's ready reckoner. It's a tool that calculates how much you need to set aside for your Self Assessment tax bill, based on your estimated weekly or monthly profit.

Let GoForma Take the Hassle Out of Your Self Assessment Payments on Account

If you find Payments on Account confusing or want to ensure you’re managing them correctly, consider consulting our accountants for self-employed. Take control of your tax payments by reaching out to an accountant today. This proactive step will help you avoid overpayments, underpayments, and potential penalties, allowing you to focus on growing your business with confidence.

FAQs on Payments on Account

Can I reduce my tax payments on my account?

If your income is expected to be much lower than last year, you can apply to reduce your Payments on Account using online method or via post through the SA303 form.

Do I still need to make Payments on Account if I expect a refund?

Yes, you still need to make the payments. Any overpayment will be refunded or applied to the next tax year.

What happens if I miss a Payment on Account deadline?

Missing a payment can result in penalties and interest charges. It’s important to pay on time to avoid these extra costs.

What is the purpose of payment on account?

The purpose of Payments on Account is to help you spread the cost of your annual tax bill over the year. Instead of paying your entire tax bill in one lump sum, you make two advance payments based on your previous year's tax liability. This ensures you stay on top of your tax obligations and avoid big, unexpected bills.