What Is a Payment on Account — and Why Is HMRC Asking for Double?

If you’ve just filed your first Self Assessment return and the bill from HMRC is almost twice what you were expecting, you’ve just discovered payments on account. It’s one of the most common shocks for people new to self-employment — but once you understand how it works, it becomes much easier to plan for.

What Is a Payment on Account?

A payment on account is an advance payment towards your next year’s tax bill. HMRC assumes your income will be similar next year, so rather than waiting for you to pay it all in January, they ask you to pay half upfront in January and the other half in July.

This means in your first year of Self Assessment, you’re effectively paying:

• Your full tax bill for the current year
• 50% of that bill as a payment on account towards next year

So if you owe £4,000 in tax for your first year, you’d pay £4,000 + £2,000 = £6,000 in January, then a further £2,000 in July. That’s why it feels like you’re paying double — because in a sense, you are, just not for the same year.

When Do Payments on Account Apply?

HMRC requires payments on account if your Self Assessment bill is over £1,000 and less than 80% of your tax was collected at source (e.g. through PAYE from a day job). If either of these conditions isn’t met, you’ll pay your tax in one lump sum rather than in instalments.

The Key Dates

• 31 January — balancing payment for previous year + first payment on account for current year
• 31 July — second payment on account for current year

Missing these deadlines results in interest and penalties from HMRC, so it’s important to have the funds ready in advance.

What If Your Income Drops?

If you know your income for the current year will be lower than last year, you can apply to reduce your payments on account. This is done through your HMRC online account or on your Self Assessment return. If you reduce them too aggressively and your actual bill turns out to be higher, HMRC will charge interest on the difference — so be cautious about over-reducing.

What Happens at the End of the Year?

When you submit your Self Assessment return for the year, HMRC calculates your actual tax bill and deducts the payments on account you’ve already made. If you’ve paid too much, you’ll receive a refund. If you’ve paid too little, you’ll owe a balancing payment — due on 31 January along with your next set of payments on account.

The Best Way to Handle It

The most effective approach is to set money aside regularly throughout the year so that when the bills arrive, you’re not caught short. A simple rule of thumb is to put 25–30% of your income aside each month into a separate savings account earmarked for tax.

Good bookkeeping throughout the year also makes it easier to forecast your tax liability early, so you’re not surprised by the January bill.

Don’t Want to Deal with This Alone?

PBAS helps sole traders and self-employed people across Scotland understand and plan for their tax obligations — including payments on account. If you’d like us to prepare your Self Assessment return or just want to understand where you stand, get in touch.