SGL Accountancy Services - Self Assessment Payments on Account Explained

If you're a sole trader or receive untaxed income, you'll likely encounter Self Assessment Payments on Account. This guide will help clarify what these payments are and how they work, so you can manage your tax obligations effectively.

What are Payments on Account?

When you file your Self Assessment tax return, HMRC requires you to make advance payments towards your next year's tax bill. This system, known as "Payments on Account," helps spread the cost of your tax liability over the year and aims to ensure you don't face a single large, unaffordable bill at the end of the tax year.

How Payments on Account Works

Calculating the Amount of Payments on Account

Your total tax due for the current year is generally used to calculate the Payments on Account for the following year. For instance, if your total tax for the year is £3,080.29, HMRC will ask you to pay half of this amount towards next year's tax bill. This typically results in two payments of £1,540.15 each.

When the Payments on Account are Paid

These payments are split into two instalments:

The first instalment is due by January 31st, along with any remaining tax you owe for the previous tax year (known as the balancing payment).
The second instalment is due by July 31st.

Balancing Payments

When the next January 31st comes around, you will file your tax return for the previous tax year. At this point, you will pay the difference between the total tax owed for that year and what you have already paid through the two Payments on Account (January and July of the previous calendar year). Additionally, you will make the first instalment towards the *following* tax year's bill.

Adjustments and Reductions

If you anticipate that your income and tax liability for the next year will be significantly lower, you can request HMRC to reduce your Payments on Account. However, this request is at HMRC's discretion, and they may require evidence of the expected decrease in income.

Important: If you reduce payments on account but then your income does not decrease as expected, you will have a much larger balancing payment to make by the following January. This is because you will have underpaid your tax throughout the year, potentially leading to financial strain. Always be cautious when reducing these payments.

Example Scenario

Let's walk through an example to illustrate how Payments on Account flow across tax years:

Year 1 (e.g., 2024/25 Tax Year)

You have a total tax liability for Year 1 of £3,080.29.

HMRC will calculate your Payments on Account for Year 2 based on this, so you will pay two instalments of £1,540.15 each.

January 31st (following Year 1, e.g., Jan 31st 2026)

You pay your tax liability for Year 1: £3,080.29
PLUS the first Payment on Account for Year 2: £1,540.15
Your total payment for January is £4,620.44.

July 31st (following Year 1, e.g., July 31st 2026)

You pay the second Payment on Account for Year 2: £1,540.15

Year 2 (e.g., 2025/26 Tax Year)

Let's assume your actual total tax liability for Year 2 is higher, at £5,000.

HMRC will then calculate your Payments on Account for Year 3 based on this £5,000, meaning two instalments of £2,500 each.

January 31st (following Year 2, e.g., Jan 31st 2027)

You file your tax return for Year 2. Your total tax owed for Year 2 is £5,000.
You have already paid £3,080.30 (2 x £1,540.15) on account for Year 2 during the previous calendar year.
Therefore, your remaining tax for Year 2 (the balancing payment) is: £5,000 - £3,080.30 = £1,919.70
PLUS the first Payment on Account for Year 3: £2,500
Your total payment for January is £1,919.70 + £2,500 = £4,419.70.

July 31st (following Year 2, e.g., July 31st 2027)

You pay the second Payment on Account for Year 3: £2,500.

This process continues annually, with the January 31st payment comprising any balancing payment for the past tax year plus the first Payment on Account for the *upcoming* tax year, and the July 31st payment being the second Payment on Account for the *upcoming* tax year.

For more detailed information, you can always refer to the official GOV.UK guidance on Payments on Account.