Over the years, Payments on Account have been a source of confusion for many taxpayers, particularly those who are new to the Self-Assessment system or whose tax liability has exceeded £1,000 for the first time.
Many individuals are often surprised to discover that settling their annual tax bill may also require advance payments towards the following year’s tax liability. Understanding how this system works can help you plan your finances better and avoid unexpected tax demands.
What Are Payments on Account?
Payments on Account are HMRC’s method of collecting Income Tax in advance. They are calculated based on your previous year’s Self-Assessment tax liability.
These payments normally apply to self-employed individuals, company directors, and other taxpayers who report income through Self-Assessment.
It is important to note that Payments on Account are calculated on the Income Tax and Class 4 National Insurance element of your tax bill. They do not include Capital Gains Tax or Student Loan repayments.
Who Needs to Make Payments on Account?
You will usually be required to make Payments on Account if:
- Your Self-Assessment tax bill is more than £1,000, and
- Less than 80% of your tax has already been collected at source, for example through PAYE.
This often affects individuals with self-employment income, rental income, investment income, or company directors receiving dividends.
When Payments on Account Do Not Apply
Payments on Account are not required where:
- Your tax bill is less than £1,000, or
- 80% or more of your tax has already been deducted at source, such as through PAYE.
Payment Schedule
Payments on Account are split into two instalments, each representing 50% of the previous year’s tax liability.
The payment dates are:
- 31 January – First Payment on Account (50%)
- 31 July – Second Payment on Account (remaining 50%)
In addition, a balancing payment may be due on 31 January of the following year once the final tax liability for that year has been calculated.
Why Payments on Account Cause Confusion
Many taxpayers find Payments on Account challenging because the payments are based on last year’s income, which may not reflect their current financial situation.
For example:
- If your income falls, you may end up paying more tax in advance than necessary.
- If your income increases, you may still face a balancing payment at the end of the year.
- Late or insufficient payments may result in interest charges and potential penalties from HMRC.
Practical Tips for Managing Payments on Account
To avoid surprises and manage your cash flow effectively:
✔ Review your expected income regularly during the year
✔ Consider applying to reduce your Payments on Account if you expect your profits to fall
✔ Plan your cash flow ahead of the January and July deadlines
✔ Seek professional advice where necessary
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