What is the payment on account system and how does it work?

If you are self employed or file a Self Assessment tax return, you may have heard of payments on account. For many taxpayers, this system can be confusing, especially when faced with a larger-than-expected bill in January.

Payments on account are advance payments towards your next year’s tax bill. HMRC uses this system to help spread the cost of tax throughout the year, rather than collecting it all at once.

This article explains what the payment on account system is, who it applies to, how the calculations work, and how to manage your payments effectively.

What is a payment on account?

A payment on account is an advance payment towards your next year’s Income Tax and Class 4 National Insurance liability. HMRC assumes your income will be similar to the previous year and asks you to pay part of your next bill upfront.

In simple terms, it means paying some of next year’s tax before the tax year has finished.

Each tax year, you may need to make two payments on account, followed by a balancing payment to settle any remaining tax owed once your actual income is confirmed.

Who has to make payments on account

Payments on account apply if:

• You file a Self Assessment tax return, and

• Your total tax liability for the year exceeds £1,000, and

• Less than 80% of your tax was collected at source (for example, through PAYE).

This system mainly affects self employed people, landlords, and those with additional income not taxed automatically, such as dividends or rental profits.

If your main income is taxed through PAYE and you have only small amounts of additional income, you might not need to make payments on account.

How the payment on account system works

Payments on account are made in two equal instalments, each covering half of your estimated tax for the following year.

• First payment: Due by 31 January (alongside your balancing payment for the previous year).

• Second payment: Due by 31 July.

These payments are based on your previous year’s tax bill (excluding any Capital Gains Tax or student loan repayments).

When you submit your next tax return, HMRC compares the total tax you owe with the payments you’ve already made. If you’ve overpaid, you’ll receive a refund or credit towards your next payment. If you owe more, you’ll make a balancing payment in January.

Example of payments on account

Let’s say your 2023/24 tax bill is £4,000.

Because this is more than £1,000 and not collected through PAYE, you will need to make payments on account for 2024/25.

• Your first payment on account is 50% of your tax bill = £2,000, due by 31 January 2025.

• Your second payment on account is another £2,000, due by 31 July 2025.

By the time you file your 2024/25 tax return in January 2026, you will already have paid £4,000 towards that year’s tax bill.

If your 2024/25 actual tax bill is:

• £4,200, you’ll owe a balancing payment of £200.

• £3,800, you’ll be due a refund of £200.

The cycle then continues, with your next payments on account based on the 2024/25 figures.

What the balancing payment covers

The balancing payment is made by 31 January following the end of the tax year. It covers:

• Any remaining tax not already paid through payments on account.

• Any Class 4 National Insurance still owed.

• Your first payment on account for the following year.

For many self employed people, this is why the January payment feels unexpectedly high—it often includes both the balance for the previous year and the first instalment for the next.

When payments on account do not apply

You do not have to make payments on account if:

• Your total tax bill for the year is less than £1,000, or

• More than 80% of your tax has already been deducted at source, such as through PAYE.

You can also request to reduce your payments on account if you expect your income to fall in the next tax year.

Reducing payments on account

If you know your profits or income will be lower next year—for example, due to reduced trading—you can apply to reduce your payments on account using your HMRC online account or by submitting form SA303.

However, you should be cautious. If you reduce payments too much and end up underpaying, HMRC will charge interest on the shortfall. It is better to estimate conservatively and adjust later if necessary.

What happens if you pay late

If you miss a payment on account deadline, HMRC will charge interest on the outstanding amount from the due date until it is paid.

If the delay continues, penalties may also apply, although HMRC can remove or reduce them if you have a valid reason for late payment.

Setting reminders and planning ahead for the January and July deadlines helps avoid these additional costs.

How to pay your payments on account

Payments can be made online through your HMRC Self Assessment account, by bank transfer, direct debit, or debit card. You’ll need your Unique Taxpayer Reference (UTR) and payment reference, which can be found on your HMRC account or previous tax return.

HMRC will automatically apply the payment towards the correct tax year.

Managing cash flow with payments on account

Because payments on account require paying part of your tax early, it is important to manage your cash flow. Good planning can prevent financial strain around deadlines.

To stay prepared:

• Set aside around 25 30% of your profits each month for tax.

• Use separate savings accounts for tax funds.

• Review your estimated income regularly.

Working with an accountant can also help you forecast future liabilities and avoid surprises when payments are due.

The role of an accountant

An accountant can:

• Calculate your payments on account accurately.

• Advise whether you should reduce or maintain them.

• Help you budget for upcoming payments.

• Ensure all deadlines are met to avoid penalties.

• Manage communication with HMRC if adjustments are needed.

Professional support helps make the system more manageable, especially in your first few years of self employment.

The bottom line

The payment on account system is designed to help taxpayers spread their Income Tax payments throughout the year, but it can catch new self employed people off guard.

Understanding how it works—and planning for both the January and July deadlines—ensures you stay in control of your finances. By keeping accurate records, budgeting regularly, and seeking advice where needed, you can avoid unexpected bills and manage your tax obligations confidently.