Payments on account are advance payments towards next year's self assessment tax bill. HMRC asks for them when most of your income is not taxed at source, so that tax is collected through the year rather than in one payment ten months after the year has ended.
How they work
There are two payments on account each year, due on 31 January and 31 July. Each one is half of the previous year's self assessment liability. If the previous year's bill was £8,000, each payment on account for the current year is £4,000.
Once the year's return is filed and the actual liability is known, any shortfall is paid as a balancing payment on the following 31 January. If you have paid too much, the excess is refunded or set against what you owe next.
Payments on account cover income tax and Class 4 National Insurance. They do not include capital gains tax or student loan repayments, which are paid with the balancing payment.
Why they arise
Tax on a salary is taken through PAYE each month. Income without tax deducted at source has no equivalent, so payments on account fill the gap. The usual sources are self-employed profits, rental income, dividends above the dividend allowance, and interest or other income not taxed before you receive it.
You do not have to make payments on account if your previous year's self assessment liability was under £1,000, or if more than 80 percent of your total tax was already collected at source, for example through PAYE.
The first year is the expensive one
The January payment that surprises people is the first one. In the first year your income falls into self assessment, you pay the whole of that year's bill as a balancing payment, plus the first payment on account for the year you are now in.
Take someone whose rental income starts in 2025/26 and produces a tax bill of £8,000. On 31 January 2027 they pay the £8,000 for 2025/26 plus a £4,000 payment on account for 2026/27, £12,000 in total. A further £4,000 follows on 31 July 2027. That is £16,000 within six months for what looks like an £8,000 tax year.
The same thing happens to a company director whose dividends grow past the point where a self assessment liability arises, and to anyone starting out self-employed.
Reducing payments on account
If you expect this year's income to be lower than last year's, you can apply to reduce your payments on account, online or on form SA303. You need a reasonable basis for the reduction. If you reduce them too far and the actual liability turns out higher, HMRC charges interest on the difference from the original due dates.
You cannot formally increase them, but you can pay more than is asked. If you know this year's income will be higher, paying extra or setting money aside avoids a large balancing payment the following January.
Paying late
Late payments on account carry interest. Late balancing payments carry interest and late payment penalties as well, starting at 5 percent of the unpaid tax after 30 days. If a bill cannot be paid in full, HMRC will often agree a Time to Pay arrangement, and it is easier to agree if you ask before the deadline rather than after.
Making Tax Digital
Making Tax Digital for Income Tax changes how often you report income, not when you pay. The quarterly updates are not tax payments, and payments on account remain due on 31 January and 31 July. What the quarterly figures do give you is an earlier view of whether this year's liability is heading above or below last year's.
What to do
Check your last tax calculation for the payments on account due next. Then compare that figure with what you expect to earn this year, and set the money aside as you go. A separate savings pot for personal tax, funded each time you take money out of the business or receive rent, is the simplest way to make sure January is not a shock.
