If you have just filed your first Self Assessment tax return and received a bill that is nearly double what you expected, you have almost certainly encountered payments on account. It is one of the most common shocks for people new to Self Assessment, and it catches a lot of people out.
This guide explains exactly what payments on account are, when you pay them, and what to do if you think your bill has been calculated too high.
Quick Answer
Payments on account are advance payments towards your next year’s Self Assessment tax bill. HMRC requires them when your tax bill exceeds £1,000 and less than 80% of your tax is collected at source. Each payment is 50% of your previous year’s bill, due on 31 January and 31 July. If you expect a lower income next year, you can apply to reduce them.
What Are Payments on Account?
HMRC does not want to wait until January for all of your tax. Once your Self Assessment bill crosses £1,000, they require you to start paying in advance towards the following year’s liability.
These advance payments are called payments on account. There are two per tax year, each equal to half of your previous year’s total tax and Class 4 National Insurance bill. They are spread across the year to ease the cash flow impact, though many people find this cold comfort the first time it happens.
When Are Payments on Account Due?
- First payment: 31 January (the same day as your balancing payment for the previous year)
- Second payment: 31 July (six months later)
So when you file your 2024/25 return by 31 January 2026, you pay three things at once: the balancing payment for 2024/25, plus the first payment on account for 2025/26. This is why first-year Self Assessment bills can feel so large.
When Do Payments on Account Apply?
Payments on account are required when:
- Your Self Assessment tax bill (including Class 4 National Insurance) was over £1,000, AND
- Less than 80% of your tax for the year was collected at source (for example, through PAYE)
If either condition is not met, you pay the full amount in January with no advance payments required.
How Are Payments on Account Calculated?
Each payment is exactly 50% of your previous year’s tax bill. HMRC calculates this automatically based on your filed return.
For example: if your 2024/25 Self Assessment bill was £3,000, HMRC will require two payments on account of £1,500 each for 2025/26. Your total January bill would be £3,000 (balancing payment) plus £1,500 (first payment on account), which is £4,500 in one go.
What Is the Balancing Payment?
Once you file your next return and your actual tax for the year is calculated, HMRC compares it against what you paid on account. If you paid too much, you get a refund. If your actual bill was higher than the payments on account, you pay the difference (the balancing payment) the following January.
How to Reduce Your Payments on Account
If you know your income this year will be lower than last year, you are entitled to apply to reduce your payments on account to reflect the lower expected bill.
You can do this through your online self assessment account, or by completing form SA303. You state what you believe your actual tax bill will be and HMRC adjusts the payments accordingly.
Important Warning
If you reduce your payments on account and your actual bill turns out to be higher than you estimated, HMRC will charge interest on the shortfall from the original due date. They do not charge a penalty for an honest miscalculation, but the interest adds up if the difference is significant.
Only reduce your payments if you have a genuine reason to expect lower income, not simply because you would prefer to pay less now.
When Do Payments on Account Stop?
Payments on account stop when your tax bill drops below £1,000, or when more than 80% of your tax is collected at source. This might happen if:
- You return to full-time employment and most of your tax is deducted through PAYE
- Your self-employed income reduces significantly
- You retire or reduce your working hours
HMRC reassesses each year based on your filed return, so the requirement can come and go depending on your income.
Common Mistakes People Make
Assuming the January bill is just for last year. Many people do not realise that the January payment includes the first payment on account for the current year. Plan your cash flow with this in mind.
Forgetting about the July payment. The second payment on account falls on 31 July each year. It often comes as an unwelcome surprise to those who were not expecting it.
Reducing payments too aggressively. It can be tempting to reduce payments to the minimum, but if your income holds steady or increases, you will face a larger balancing payment the following January plus interest.
Not filing early enough to plan. You can file your Self Assessment return from 6 April onwards. Filing early gives you months of notice before the January deadline and time to plan your payments.
Frequently Asked Questions
Do payments on account include Capital Gains Tax? No. CGT is not included in payments on account. Any CGT liability is paid as a lump sum in January alongside your balancing payment (unless residential property gains were reported and paid within 60 days of completion, in which case they may be offset).
Can I spread my January payment on account over several months? Not through HMRC directly. However, some people set up a monthly savings pot to spread the cost informally. If you cannot pay on time, contact HMRC to discuss a Time to Pay arrangement before the deadline.
What interest does HMRC charge on late payments on account? HMRC’s late payment interest rate changes periodically and is linked to the Bank of England base rate. Check HMRC’s website for the current rate.
My income goes up and down each year. How do I manage payments on account? This is common for freelancers and sole traders. You can adjust payments on account each year to reflect your expected income. A tax specialist can help you estimate accurately and avoid both underpayment interest and unnecessary cash flow strain.
Do I need to pay National Insurance in addition to payments on account? Class 4 National Insurance (paid by self-employed people) is included in the payments on account calculation. Class 2 National Insurance is paid through Self Assessment but is not included in the payments on account base.
Need Help With Your Self Assessment Bill?
Sat Bhatti is an ACCA and ATT qualified tax specialist and HMRC Registered Agent with over 25 years’ personal tax experience. If your Self Assessment bill has come as a surprise, or you want help managing your payments on account efficiently, Kent Tax Specialists can help.
We work with self-employed individuals, contractors, landlords and higher earners across Gravesend, Dartford, Medway, Maidstone, Sevenoaks, Tonbridge, Tunbridge Wells and the wider Kent area. Get in touch today for honest advice and a fixed-fee quote.
Also see: Do I Need to File a Self Assessment Tax Return? | Self Assessment in Gravesend | Self Assessment Services
