How Do Self-Assessment Payments on Account Work in the UK?

We are at that time of year when most small business owners have just paid their income tax via Self Assessment.

You are probably familiar with self-assessment, but we are often asked about payments on account, which are advance payments toward your tax bill, and how they work.

 

What Are Payments on Account?

Payments on account are designed to spread the cost of your tax bill across the year. They help taxpayers avoid one large payment at the end of the tax year. These payments are required for those whose self-assessment tax bill exceeds £1,000, unless more than 80% of their income is already taxed at source (e.g., through PAYE).

That is the principle behind them. But all too often they create an issue in that many forget that the second payment is due.

 

When Are Payments on Account Due?

You are required to make two payments on account each year, with deadlines as follows:

  1. 31 January: The first payment on account (for the current tax year).
  2. 31 July: The second payment on account.

Each payment typically represents 50% of your prior year’s tax liability.

For example, if your tax bill for 2023/24 was £4,000, each payment on account for 2024/25 would be £2,000.

 

How Are Payments on Account Calculated?

Payments on account are based on your previous year’s tax bill, excluding:

  • Class 2 National Insurance contributions
  • Capital Gains Tax
  • Student loan repayments

If your previous year’s tax liability was £1,500, you’d make two payments of £750 each.

 

Balancing Payments

Once the tax year ends, your total tax liability is calculated. If the payments on account were too high or too low, a balancing payment or refund will be due:

  • Balancing Payment: If your actual tax bill exceeds your payments on account, you’ll need to pay the difference by the following 31 January.
  • Refund: If your tax bill is lower than expected, HMRC will refund the overpaid amount, or it can offset the amount against your future tax payments.

 

Can You Reduce Payments on Account?

If you believe your tax bill for the current year will be lower than the previous year, you can apply to reduce your payments on account. However, caution is advised:

  • If you reduce payments too much and your actual tax liability is higher, HMRC will charge interest on the shortfall.
  • If you don’t have an accountant , then you can use the HMRC online portal or form SA303 to request a reduction.

 

Example of Payments on Account in Practice

.Let’s say your tax bill for 2022/23 was £3,000:

  1. For the 2023/24 tax year, you’ll need to make two payments on account of £1,500 each (50% of £3,000):
    • £1,500 due by 31 January 2024
    • £1,500 due by 31 July 2024
  2. If your actual tax liability for 2023/24 is £3,600, you’ll owe a balancing payment of £600 by 31 January 2025.
  3. For the 2024/25 tax year, your payments on account will increase to £1,800 each (50% of £3,600).

 

Payments on account are part of the UK’s self-assessment system and a liability that you should understand.

By understanding how they work, you can manage your cash flow better and avoid surprises at tax deadlines. If you’re unsure about your liability or need to reduce payments, seek advice from a tax professional or consult HMRC directly.