Payments on Account: How Advance Tax Payments Work
Introduction
Payments on account are advance payments toward your next year's tax bill. If you're self-employed and your tax bill exceeds £1,000, HMRC usually requires you to make two payments on account during the year.
What Are Payments on Account?
Payments on account are prepayments of Income Tax and Class 4 National Insurance based on your previous year's tax bill. They're designed to spread your tax payments throughout the year rather than having one large bill.
How They Work
- Two payments per year: 31 January and 31 July
- Each payment is 50% of your previous year's Self Assessment bill
- Paid in addition to any balancing payment for the previous year
When Do They Apply?
Payments on account are required if:
- Your Self Assessment tax bill is more than £1,000, AND
- Less than 80% of your tax was collected at source (PAYE, etc.)
Example
If your 2024/25 tax bill was £3,000:
- 31 January 2026: Pay £1,500 (first payment on account)
- 31 July 2026: Pay £1,500 (second payment on account)
- 31 January 2027: Pay any balancing amount for 2025/26
Payment Schedule
First Year Filing
In your first year of Self Assessment:
- No payments on account (no previous year to base them on)
- Full tax bill due 31 January
Subsequent Years
For 2025/26 tax year:
| Date | Payment |
|---|---|
| 31 January 2026 | 1st payment on account (based on 2024/25) |
| 31 July 2026 | 2nd payment on account (based on 2024/25) |
| 31 January 2027 | Balancing payment for 2025/26 + 1st POA for 2026/27 |
Calculating Payments on Account
The Formula
Each payment on account = 50% of previous year's tax bill
What's Included
- Income Tax (from Self Assessment)
- Class 4 National Insurance
What's NOT Included
- Class 2 National Insurance
- Student Loan repayments
- Capital Gains Tax
Reducing Payments on Account
If you expect your income to decrease, you can apply to reduce your payments on account.
When to Reduce
- Income is dropping significantly
- Taking time off for family/health
- Major client lost
- Switching to employment
How to Reduce
- Log into your HMRC online account
- Complete form SA303 or request reduction online
- Provide estimated lower income figure
- HMRC will adjust your payments
Warning
If you reduce payments too much and your actual bill is higher:
- Interest charges apply on underpayment
- Be conservative with estimates
What If You Can't Pay?
Time to Pay Arrangement
If you're struggling to pay:
- Contact HMRC before the deadline
- Call the Payment Support Service: 0300 200 3835
- Explain your situation
- Propose a payment plan
HMRC may agree to spread payments over months, but interest will apply.
Penalties for Late Payment
| Days Late | Penalty |
|---|---|
| 30 days | 5% of tax owed |
| 6 months | Additional 5% |
| 12 months | Additional 5% |
Plus interest on unpaid amounts.
First Year Shock
Many new sole traders are surprised by their first significant tax bill because:
- No payments on account in year one
- Full bill due in one payment
- Then payments on account start immediately
Example: First Year Trap
- 2024/25 profits: £40,000
- Tax bill due 31 January 2026: ~£7,000
- PLUS first payment on account for 2025/26: ~£3,500
- Total due 31 January 2026: ~£10,500
Always save for tax throughout the year.
Budget Planning Tips
Monthly Savings Rule
Set aside 25-30% of your profits monthly:
- Covers Income Tax
- Covers Class 2 and Class 4 NI
- Builds buffer for payments on account
Separate Tax Account
Keep a separate bank account for tax savings:
- Not tempted to spend it
- Clear visibility of tax funds
- Earns interest while waiting
FAQs
Can I pay earlier than the deadline?
Yes. You can make payments at any time through your HMRC account.
What if I overpay?
HMRC refunds overpayments automatically, or you can request offset against future bills.
Do payments on account ever stop?
Yes, if your tax bill drops below £1,000 or more than 80% is collected at source.
What about company directors?
Limited company directors pay tax through PAYE on salary. Payments on account apply to dividend tax if substantial.
Conclusion
Payments on account spread your tax burden but can cause cash flow surprises, especially in year one. Plan ahead by saving 25-30% of profits monthly and consider reducing payments on account if your income is dropping. Never ignore tax bills - contact HMRC early if you're struggling to pay.
Ready to file your Self Assessment the easy way?
Start your 30-day free trial with QTax.