Payments on account can catch you out if you submit a UK Self Assessment tax return and owe more tax than expected. They are advance payments towards your next tax bill, and they can create a nasty shock if you only budget for the tax you already owe.

This episode is for self-employed people, landlords, company directors, shareholders and anyone with untaxed income who needs to understand how payments on account work. We explain what they are, when they apply, how they are calculated, when they are paid, and what you can do if your future tax bill is likely to be lower.

About this episode

Payments on account are not always properly explained, but they are an important part of the UK Self Assessment system. If money reaches your pocket without tax being deducted first, you may need to complete a tax return and pay what you owe directly to HMRC.

In this episode, we explain the basic framework of Self Assessment, why payments on account exist, how HMRC uses last year’s tax bill to estimate the next one, and why setting money aside throughout the year matters.

If you are self-employed and want a wider foundation before looking at payments, our episode on Tax basics for self employed: What You Need to Know is a useful starting point.

Why payments on account matter

Payments on account matter because they affect your cash flow. You may think your January tax bill is just the tax for the year you have already completed. However, if payments on account apply, you may also need to pay an advance amount towards the next tax year.

That means January can feel heavier than expected. You may have your balancing payment for the previous tax year, plus the first payment on account for the next tax year. The second payment on account is normally due later in July.

This is why tax planning is not just about completing a return. It is also about saving regularly, understanding your likely tax bill, and avoiding surprises before the deadline arrives.

Key points from this episode

What are payments on account?

Payments on account are advance payments towards your next Self Assessment tax bill. HMRC uses your previous year’s tax bill as a guide and asks you to pay towards the next year before that return is completed.

They are designed to spread the cost of tax into instalments. However, they can still feel like a shock if you are not expecting them.

They are especially relevant where your income has not already had tax deducted at source. This can include self-employment income, rental income, dividends and other untaxed income.

Who needs to watch out for payments on account?

You should pay attention to payments on account if you complete a Self Assessment tax return and your tax bill is above the relevant threshold.

This often affects self-employed people, landlords, directors and shareholders who receive income that is not fully taxed before it reaches them.

PAYE employees may have most of their tax collected through payroll. However, once income falls outside that system, more responsibility sits with you to calculate, report and pay the right amount on time.

How payments on account are calculated

Payments on account are usually based on your previous year’s Self Assessment tax bill. Each payment is normally half of that previous bill.

For example, if your relevant tax bill was £4,000, HMRC may ask for two payments on account of £2,000 each. The first is normally due by 31 January and the second by 31 July.

If you have already made payments on account in the previous year, those payments are offset against your final tax bill. If they do not cover the total amount owed, the remaining amount is called a balancing payment.

Why the first year can feel painful

The first time payments on account apply, the amount due can feel especially heavy. That is because you may need to pay the tax you owe for the year just ended, plus the first payment towards the next tax year.

This is where many taxpayers are caught out. They budget for one tax bill, but the system asks for an advance payment as well.

Understanding this early gives you time to prepare, save and avoid a last-minute scramble.

Can you reduce payments on account?

You may be able to reduce your payments on account if you expect your next tax bill to be lower than last year’s.

That might happen if your profits fall, your income changes, your allowances increase, or your tax position changes. However, the reduction should be realistic and based on a sensible estimate.

If you reduce payments too much and your final tax bill is higher than expected, HMRC may charge interest on the difference. Therefore, reducing payments on account needs care.

How to prepare for payments on account

The best way to deal with payments on account is to plan ahead. Every time you raise an invoice, receive rental income, take dividends or earn untaxed income, set aside a proportion for tax.

A separate savings account can help. That way, the money for tax is not mixed in with everyday spending or business cash flow.

You can also estimate your likely tax bill during the year. This helps you avoid surprises and gives you time to adjust your savings before the payment deadline.

What to check before the deadline

• Do you need to submit a Self Assessment tax return?
• Was your previous tax bill high enough to trigger payments on account?
• How much tax have you already paid through PAYE or other deductions?
• Do you have untaxed income from self-employment, rent, dividends or other sources?
• Are your profits likely to be higher or lower this year?
• Do you need to reduce your payments on account?
• Have you saved enough for the January and July deadlines?
• Have you allowed for any balancing payment?

If a missed deadline leads to penalties or interest, our episode on HMRC Reasonable Excuse: How to Appeal a Tax Penalty Successfully explains what to consider when appealing a tax penalty.

FAQs about payments on account

What are payments on account?

Payments on account are advance payments towards your next Self Assessment tax bill. They are usually based on the previous year’s tax bill and paid in two instalments.

When are payments on account due?

Payments on account are normally due by 31 January and 31 July. The January deadline may also include any balancing payment for the previous tax year.

Can I reduce payments on account?

You can ask HMRC to reduce them if you expect your next tax bill to be lower. However, if you reduce them too far, interest may be charged on the underpaid amount.

Why did my January Self Assessment bill look higher than expected?

It may include more than one amount: the tax still owed for the previous year, plus the first payment on account towards the next tax year.

Episode Timecodes

• 00:00 – Why payments on account can create a tax shock
• 00:40 – Introducing payments on account
• 01:04 – What we cover: calculation, reduction and payment dates
• 01:24 – How the UK Self Assessment system works
• 02:29 – Rishi and Boris example: profits and tax bills
• 03:29 – Self Assessment deadlines and first payments
• 03:57 – When payments on account are triggered
• 04:44 – January and July payment dates
• 05:44 – Existing taxpayers and payments already made
• 08:20 – Why HMRC assumes next year will follow last year
• 09:05 – Reducing payments on account
• 10:27 – Saving ahead for your tax bill
• 12:16 – Final reminder to watch your tax bill

Related episodes

• Tax basics for self employed: What You Need to Know
• Tax and Your Self-Employed Business: Sole Trader or Limited Company?
• HMRC’s Invisible Crackdown: What Business Owners Need to Know

Key takeaway

Payments on account explained simply are advance payments towards your next tax bill. They can help spread tax across the year, but they can also surprise you if you are not prepared.

The practical answer is to understand when they apply, estimate your tax during the year, save regularly, and only reduce payments on account when you have a sound reason to do so.

Plan it, Do it, Profit.

“Payments on account are not extra tax, but they can feel like extra tax if you have not planned for them.”

Further Support

The I Hate Numbers podcast helps business owners understand accounting, tax, finance, profit, cash flow, and business planning in a practical way. We simplify financial topics so you can make better decisions and feel more confident with your numbers.

You can also watch more practical finance and tax support on the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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If you submit a UK tax return and you owe more than a thousand pounds, then be aware of payments on account. If you're not prepared for this, then your bank balance and your nerves will experience a nasty shock.

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks. My name is Mahmood and for over 26 years I've been helping businesses like yours navigate the world of numbers, improve your profits, save tax and time, and above all, improve your well-being. Now, in today's podcast of I Hate Numbers, it's all about payments on account. It's a topic that's not properly talked about or understood, so I do appreciate it's not a natural dinner-party conversation.

I'm going to dive deep into payments on account. We're going to look up what they actually are, how they are calculated, what you can do to reduce them, and when you've got to pay them. Now, to help me with this, I'm going to call upon my friends, Rishi and Boris, to actually demonstrate the payments, how they work with some dates and some numbers as well.

Now, before we dive deeper into payments on account, let's have a look at the general framework of how the UK personal tax system works. Now, if you have money that you are receiving, that's not been taxed before it ends up in your pocket, then you must register with HMRC. HMRC represents Her Majesty’s Revenue and Customs, which is a very long-winded way of saying the tax office.

Once you register, when it comes time, you must complete a personal tax return. It's within the system called self-assessment, which means you tell HMRC what you've been up to, and I don't mean your hobbies, or movies you've seen, or what you've had for dinner, but it's about what your income has been for the year in question.

If you've had any capital gains for that year in question, fill that in, work out the tax, make sure you submit it by the relevant dates, and if there's any money to pay, make sure you pay on time. If you don't do so, by the way, the stick comes out, HMRC will wrap you over the knuckles, ask for the money, and charge you interest, and possibly penalties.

Now, let's introduce my two friends, Rishi and Boris. What they have in common, they're both self-employed. They both make profits subject to tax around about 25,000 pounds a year. They both have got to send in tax returns for the year 2021, and it works out that tax bill is estimated at around 4,000 pounds. Now, if you're listening to this and thinking, how did I work that out, apart from introducing a knowledge of tax here, I'm going to share a resource with you in the show notes where you can punch the numbers into a free online calculator, as soon as you typed in those numbers,

the tax figure will appear in front of you. So, don't worry too much about having to do the heavy lifting of calculations. Now, Rishi started his business as a full-time self-employed tax advisor in April, 2020. He had to register for self-assessment and for him, his first tax return that he has to complete and send in will be covering the 2021 tax year, and 2021

tax year is income between the 6th of April, 2020 and the 5th of April, 2021. If we talk in terms of dates, his deadline for sending in his tax return is the midnight of the 31st of January, 2022. He's got to pay any tax that's due by the 31st of January, 2022, midnight, and also, if payments on account kick in, he has to make two installments, two payments of his payments on account.

I'll throw some numbers in later on just to demonstrate what we're talking about. Now, Rishi, as we said earlier, owes 4,000 pounds worth of tax and national insurance, and because he owes more than 1,000 pounds worth of tax, the regime of payments on account, or POA to give it a nice short acronym, kicks in.

Now, the good news, if you can call it that, is that additional 4,000 pounds on top of his tax bill is payable in two installments, two equal installments of 2,000 pounds each. So, let's summarise what we have so far for Rishi. His tax bill is over a thousand pounds, at 4,000. That triggers payments on account. The total payments on account overall will be four grand, and he pays those payments on account in two installments. One on

the 31st of January, 2022, and the second one on the 31st of July, 2022. Now, if you're sitting at home thinking, this sounds like a bit like daylight robbery here, he's got a tax bill, he's got to pay more, the payments on account that Rishi is paying and any taxpayer will pay is money you are paying upfront to HMRC

for your future tax bill, and what HMRC are basically saying is, give us the money for next year's tax bill, but we want to collect it before you complete your tax return. So, this is good for them. They get cash flow. This is good for them because it means there's less chasing you up. It's also good for you as a taxpayer, by the way, because it sharpens the mind and focuses that you've got to make payments.

At the end of the podcast, I'm going to share a tip with you about how you can mitigate and actually make sure that you've got enough money to pay your tax bill. Now, the payments on account, I'm going to talk to you later on in this podcast. There is the opportunity, the possibility that Ruhi can reduce those payments,

but more of that later. Now, let's contrast that with Rishi's friend, Boris. Now, Boris has been self-employed. The only difference is that Rishi has been self-employed for several years as a writer and a speaker on Greek history. Now, Boris asks Rishi to prepare his tax return for him. Rishi announces that Boris, because his profit levels are at 25K, owes also tax of 4,000 pounds.

Now, the same principle will apply for Boris with a little twist. Now, because Boris has been self-employed for several years, he's used to this regime of payments on account. So, when Boris had his tax return prepared last year, when he sent it in for the 2019/2020 tax year, at that time, his tax was such that his payments on account were a mere 800 pounds each.

So, Boris, being the good citizen, would've made his first 800-pound installment by midnight January, 2021. The second payment on account he would've made by midnight, 31st of July, 2021. So, by the time it comes to settle his 2021 tax bill, Boris has already paid 1600 pounds towards that. So, by the time we fast forward to midnight, 31st of January, 2022, Boris has to find

the money to pay his tax of 4,000. He can deduct the 1,600 pounds he's got, he's paid already, so, therefore, he's only got to find 2,400. Now, like Rishi though, Boris has also got to make two installments of payments on account of 2,000. The first one, 31st of January, 2022. The second one, the 31st of July 2022. So, let's summarise before we move on the situation for both taxpayers. Rishi, brand new taxpayer, a tax bill of 4,000 that's got to be paid,

00:07:3

He's already been making payments on account, so what he's got to settle is offset and reduced by the payments on account he's made already. Like Rishi, though, he's still going to make those payments on account of two grand a time. I said at the beginning of the podcast, there's the opportunity of the taxpayer reducing their payments on account.

Now, here's the system of payments on account and what HMRC will say is: Okay folks, we want you to pay towards next year's tax bill. We are assuming, notice the word assuming, that next year's tax bill is going to be in line with this year's tax bill. Now, we know that the future doesn't always follow the past, so there could be a number of reasons why

the tax that you pay for the following year may not be at the same level. Now, if it's likely that your tax bill in the following year is going to reduce. Perhaps you've got a change of direction in your business. Perhaps profits are not going to be as healthy. Perhaps you've got additional allowances. Perhaps you've tapped in to some tax planning here, and there are ways to mitigate and reduce

your tax bill. Now, if you anticipate, if you estimate that your tax bill will be lower, then you can reduce your payments on account. Good news, there is a but, a thing you, one needs to be really, really careful of. HMRC say you are making the judgment call if you think your tax bill is going to be lower. By all means, reduce your payments on account.

However, if it transpires that you've incorrectly estimated, or fortunes favor you, and your self-employed business takes off, improves, makes more money next year, then you would've innocently calculated a reduction in payments on account that's too much. So, HMRC as a bare minimum will expect interest of you for that underpayment.

The second thing you've got to be aware of, if you are recklessly making those reductions for whatever reason, and if HMRC suspect you are being a bit naughty, you're taking the my call, they do have the opportunity of actually leaving a penalty on top of it. The whole idea is like a game of dare if you think it's going to go down,

if you've got good reasons for doing that, you tap into a good tax advisor, you've got a good knowledge, by all means, reduce them. You can always change these things over time, but that's the reduction that you can make. Obviously, if profits are likely to carry on improving, then there is no flexibility necessarily to reduce those payments on account.

Now, to wrap up and a few tips to share, folks. The big difference between being self-employed, being a landlord who might have some rental income, being a director shareholder who has income by way of dividends, is that money that ends up in your pocket, that money that ends up in your bank account, has not had tax taken off it as though it was PAYE.

So, therefore, there's more responsibility on your shoulders to make sure you've put enough to cover your tax bill. My advice would be hop on, click into the show notes. There's a link to a free online calculator, whereby a few seconds of your time punching some numbers, and it'll give you an indication of what your tax bill will be and what your payments on account will be.

The second thing I would say, look at what your situation has been for how much tax you're paying against how much revenue, and as a rule of thumb, you put a percentage of what you bill your clients a way to cover your tax bill. What you should do is to get into the habit of saving. Every time you raise an invoice and you bill a client, every time you receive money from a client, from your dividends, put a proportion of that away in a separate account, and save towards your tax.

When the time comes to figure out how much you owe, hopefully, you've collected, you've saved all the money necessary. If you’ve saved too much, there's a nice little windfall. If you haven't saved enough, at least the pain, the gap is not going to be too dramatic to make up. Folks, I hope you found this useful. I hope you got some value from this podcast.

I love sharing the world of numbers. I love sharing the advice, and I hope that it's practical and applicable. If you've loved the podcast, if you've liked the podcast, I would appreciate it if you could share that. Make comments. If you've got suggestions for a future podcast episode, something that you would like to add, by all means, flag it up to me.

Apart from that, folks, keep an eye on your payments on account, keep an eye on your tax bill, check out the show notes, and until we see each other next week, have a great week. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode.

We look forward to you joining us next week for another I Hate Numbers episode.