Payments on Account

Payments on account are advance payments towards your self-assessment tax bill. HMRC requires them when your tax liability for the previous year was £1,000 or more and less than 80% of that liability was collected at source (through PAYE or other deductions).

Each payment on account is half of the previous year’s tax bill. You make two payments during the year, with any remaining balance settled through a balancing payment after the year ends.

When Payments on Account Are Due

The self-assessment tax year runs from 6 April to 5 April. For any given tax year, the payment schedule is:

Payment	Due date	Amount
First payment on account	31 January during the tax year	50% of previous year’s liability
Second payment on account	31 July after the tax year ends	50% of previous year’s liability
Balancing payment	31 January following the tax year end	Any remaining liability

Example Timeline

For a tax year that runs from 6 April to 5 April:

Date	Payment	Based on
31 January during the tax year	First payment on account for the current tax year	50% of previous tax bill
31 January during the tax year	Balancing payment for the previous tax year	Remainder of previous liability
31 July after the tax year ends	Second payment on account for the current tax year	50% of previous tax bill
31 January after the tax year ends	Balancing payment for the current tax year	Remainder of current liability

This means the 31 January deadline often involves two payments: the balancing payment for the year just ended and the first payment on account for the current year.

How Payments on Account Are Calculated

The calculation is based on your total self-assessment liability for the previous year, minus any amounts collected at source. Only the following taxes are included:

Income Tax not collected through PAYE
Class 4 National Insurance for self-employed individuals
Student loan repayments collected through self-assessment (in some cases)

Capital Gains Tax is not included in payments on account. It is paid separately through the balancing payment.

Calculation Example

A self-employed sole trader has a previous tax year liability of £8,000 after deducting PAYE already collected:

Component	Amount
Total previous self-assessment liability	£8,000
First payment on account for the current tax year (due 31 January)	£4,000
Second payment on account for the current tax year (due 31 July)	£4,000
Total payments on account	£8,000

If the actual current-year liability turns out to be £9,500, the balancing payment due the following 31 January would be £1,500.

If the actual current-year liability turns out to be only £6,000, HMRC would refund £2,000 after the return is filed.

Who Has to Make Payments on Account

You must make payments on account if both of the following apply:

Your self-assessment tax bill for the previous year was £1,000 or more
Less than 80% of your total tax liability was deducted at source

This typically applies to:

Self-employed sole traders and partners
Company directors with significant dividend income
Landlords with rental income
Anyone with untaxed investment income above a certain level

You do not need to make payments on account if:

Your previous year’s tax bill was below £1,000
More than 80% of your tax was collected through PAYE
This is your first year of self-assessment (no previous year to base the calculation on)

Reducing Payments on Account

If you expect your income to be lower than the previous year, you can apply to reduce your payments on account. This is done through your HMRC online account or by writing to HMRC.

When to Consider Reducing

You have lost a client or contract and expect lower self-employment income
You have stopped receiving rental income (e.g. sold a property)
Your dividend income has dropped because the company is retaining profits
You have started a PAYE job that will collect most of your tax at source

Risks of Reducing

HMRC charges interest on any shortfall if you reduce your payments on account below the correct amount. The interest runs from the original due date, so underpaying carries a cost.

You are not penalised for reducing in good faith, but HMRC may challenge a reduction that appears unreasonable. It is sensible to keep a record of the basis for your estimate.

Late Payment

Missing a payment on account triggers interest from the due date, calculated daily at the HMRC late payment interest rate. This rate is the Bank of England base rate plus a fixed margin set by HMRC, and the current rate is published on GOV.UK.

Penalties may also apply if payments remain outstanding:

Period overdue	Penalty
30 days	5% of the unpaid amount
6 months	A further 5%
12 months	A further 5%

These penalties apply to the balancing payment rather than to payments on account directly, but unpaid payments on account increase the balancing payment and therefore the penalty exposure.

Managing Payments on Account

Budget Throughout the Year

Set aside a fixed percentage of your income each month into a separate savings account to cover tax payments. For a basic-rate taxpayer with self-employment income, budgeting 25-30% of profits is a reasonable rule of thumb.

Use Your HMRC Online Account

Your HMRC account shows:

What payments on account are due and when
Your previous year’s tax liability
Any balancing payment or refund after filing your return
The option to reduce payments on account online

File Your Return Early

Filing your self-assessment return early (you can file from 6 April) gives you a clear picture of any balancing payment due on 31 January. It does not change the payment deadline, but it removes the uncertainty.

Consider a Time to Pay Arrangement

If you cannot afford a payment on account when it falls due, contact HMRC before the deadline to request a Time to Pay arrangement. This allows you to spread the payment over instalments and avoids the 5% late payment penalty (though interest still accrues).