If you're self-employed or receive income that isn't taxed at source (like rental income or dividends), you may have heard of payments on account. They're one of those HMRC quirks that can catch people off guard – especially in your second year of trading.
Let's break it down simply.
What Are Payments on Account?
Payments on account are advance payments towards your next year's tax bill.
Here's the idea:
- You file a tax return showing your profit for the year.
- HMRC uses that tax bill as an estimate of what you'll owe next year.
- Instead of waiting until next year, you pay half of it in advance – twice.
These payments are due on 31 January (the same day as your main tax bill) and 31 July. Each payment is usually 50% of your previous tax bill, not including student loans or capital gains.
A Worked Example
Let's say you made £30,000 profit from self-employment and your tax bill for that year is £4,000.
Taking 2023/24 as the first year, on 31 January 2025 you pay the £4,000 tax bill for 2023/24.
But because HMRC expects you to earn a similar amount in 2024/25, it also asks you to start paying next year's bill in advance:
- Payment on account 1: £2,000 (50% of £4,000) – due 31 January 2025
- Payment on account 2: £2,000 – due 31 July 2025
So on 31 January 2025 you pay £4,000 (last year's tax) plus £2,000 (the first payment on account): £6,000 in total. Then another £2,000 in July.
What If I Earn Less Next Year?
If you think your income will be lower next year, you can ask HMRC to reduce your payments on account.
But a word of caution: if you reduce them too much and end up owing more, HMRC will charge interest on the shortfall. So don't guess too low.
What Happens the Year After?
Let's say your actual tax bill for 2024/25 turns out to be £4,200. You've already paid £4,000 on account, so you only owe the £200 balance, due by 31 January 2026. At the same time, a new round of payments on account starts, based on the £4,200.
So it's a rolling system, always looking one year ahead.
A Helpful Comparison: Your Energy Bill
Energy suppliers usually charge estimated monthly payments based on your past usage, then compare them with your actual meter readings and either bill you for the difference or refund you.
HMRC does the same with payments on account. It looks at last year's tax bill, assumes this year will be similar, collects two instalments in advance (January and July), and adjusts the total when you file your next return. If you've overpaid, HMRC owes you; if you've underpaid, you top it up.
Key Takeaways
- Payments on account are advance tax payments based on last year's bill.
- They're paid in two instalments: 31 January and 31 July.
- You only make them if your last tax bill was £1,000 or more and less than 80% of it was deducted at source.
- You can apply to reduce them if your income is falling – but be cautious.
- They can come as a shock in your second year, so plan ahead.
Payments on account are a cash-flow issue as much as a tax one: the January bill can be much larger than people expect. Planning for it is far easier when your figures are kept up to date through the year — see why profitable businesses still run out of cash. If you'd like help checking yours, that's part of our accounting and tax work.