Payments on account are one of the most common surprises in Self Assessment. You file your first return, expect to pay one amount, and find the bill is larger because it includes a payment towards next year. Understanding the idea in advance takes the sting out of it.
What they are
A payment on account is an advance payment towards your next tax bill. It is not a fee and it is not a penalty. It is your money, paid early, and it counts towards what you owe. The system exists so that tax is paid as it is earned rather than all at once, many months later. They are worked out from your previous return, which is why they can feel disconnected from the year you are actually living through.
Once you are in the system, you usually make two of these payments each year, and each one is normally half of your previous bill. When the year ends and your real figures are known, the payments already made are set against the final amount.
When they are due
The two dates are fixed and worth writing down now. The first payment on account is due on 31 January, alongside your return. The second is due on 31 July. From the second year onwards, each January brings the balancing amount for the year just ended plus the first payment on account for the next one, which is why the January figure can look large.
If your income is steady, the two payments often cover most of the following bill. If your income has fallen, paying the full amount can leave you overpaid until the position is corrected, so it is worth reviewing rather than paying without thinking.
Can they be changed
Yes. If you expect your profits to be lower than last year, you can ask HMRC to reduce your payments on account. The right figure is a careful estimate, not a guess, because if you reduce them too far and the real bill is higher, interest can apply to the shortfall.
The other side is also true. If your income rises, the payments may need to increase, and it is better to plan for that than to be caught by it in January.
Keeping it simple
A few habits keep payments on account from becoming a problem.
- Put the two dates, 31 January and 31 July, in your calendar every year.
- Set money aside through the year rather than saving for one January bill.
- Review your estimate each autumn, when you have a clear view of the year.
- Tell your accountant early if your income has changed, so the payments can be adjusted.
- Check the amount is right before you pay, rather than after.
If payments on account still feel opaque, that is normal at first. Once you have been through a full year the pattern makes sense, and a named accountant can keep the figures in view so each January holds no surprises.
