Self Assessment Payments on Account Explained

Every year, a fresh batch of newly self-employed people open their Self Assessment bill expecting one number and find something closer to one and a half times that. It is not a mistake. It is payments on account, and understanding how they work before your first tax year end saves you a very unpleasant surprise.

What Payments on Account Actually Are

HMRC does not wait for the following year to collect tax it reasonably expects you to owe again. If your Self Assessment tax bill crosses a certain threshold, HMRC assumes your next year's bill will be roughly similar and asks you to pay half of it in advance, on top of what you already owe for the year just finished.

When You Have to Pay Them

You are required to make payments on account if your Self Assessment tax bill was more than £1,000, and less than 80% of the tax you owed was already collected at source, for example through PAYE. That £1,000 threshold only counts income tax and Class 4 National Insurance, it excludes Capital Gains Tax, Class 2 National Insurance, and student loan repayments, so check the actual figure HMRC gives you rather than estimating it yourself.

How Much Each Payment Is

Each payment on account is 50% of your previous year's total tax liability. HMRC calculates this automatically based on your last submitted return and splits it into two instalments, due on 31 January and 31 July.

Why the First Year Feels So Painful

If this is your first year making payments on account, 31 January asks you to pay three things at once, your full tax bill for the year that just ended, plus your first payment on account for the year ahead. Together that can mean paying up to one and a half times your actual tax bill on a single date. The second payment on account then falls due the following 31 July, with no new bill attached to it, just the second half of the advance payment.

What Happens If Your Income Drops

Payments on account are based on last year's figures, not this year's actual income, which can leave you overpaying if your income falls. You can apply to reduce your payments on account if you genuinely expect to earn less, either online through your HMRC account or by post using form SA303. Be careful with this though, since if you reduce them too far and your income does not actually drop as much as predicted, HMRC will charge interest on the shortfall.

How the Balancing Payment Works

Once your actual tax return for the year is filed, HMRC compares what you actually owed against the two payments on account you already made. If you paid too much, you get a credit or refund. If you paid too little, a balancing payment is added to your next 31 January bill, on top of that year's payment on account. This is exactly how the cycle keeps repeating every year once you are in it.

The Practical Fix

The surprise only really happens once. After your first year, you know both payments on account are coming, and the smart move is setting aside roughly a third of your income throughout the year rather than treating January as a single unpredictable bill. Orlo's Business workspace keeps every invoice and receipt filed by date as they come in, and reminds you ahead of both the 31 January and 31 July deadlines, so payments on account stop being the thing that catches self-employed people out every single year.