Self-Assessment Payments on Account

An element of the Self-Assessment system that we are often explaining to our clients is Payments on Account. It is a confusing area especially for new taxpayers or those who have not come across it before.

Firstly, what is Self Assessment?

It’s how individuals report their income and gains to HM Revenue and Customs each tax year. Typically, if you’re self-employed, a landlord, or have significant investment income, you’ll need to file a Self Assessment tax return to calculate how much tax and National Insurance you owe.

What are Payments on Account?

Payments on Account are advance payments towards your tax bill. HMRC asks taxpayers who owe more than £1,000 in tax for the year, to make these payments to help spread the cost of their annual tax liability.

Instead of paying the entire amount you owe when your tax return is due in January, HMRC asks you to pay half of the tax you expect to owe in advance through two Payments on Account:

  1. First Payment on Account – due by 31st January (same day as your tax return deadline).
  2. Second Payment on Account – due by 31st July.

Each payment is usually 50% of your previous year’s tax bill.

Why do Payments on Account exist?

The main purpose of Payments on Account is to ensure that taxpayers are paying tax as they earn the income, instead of making a lump-sum payment long after the income is earned. This is especially useful for self-employed individuals, who do not have tax deducted at source as employees do through the PAYE system.

How are Payments on Account calculated?

Payments on Account are calculated based on the tax you owed in the previous tax year. For example, if your total tax bill for 2022/23 was £3,000, HMRC will ask you to make two Payments on Account of £1,500 each (£3,000 ÷ 2).

What happens if your income changes?

If you expect your tax liability to be lower in the following tax year, you can ask HMRC to reduce your Payments on Account. However, be cautious—if you reduce them too much and end up underpaying, HMRC will charge interest on the shortfall. On the other hand, if your income increases and you owe more tax than the previous year, you’ll need to pay a “balancing payment” when you submit your next tax return. The balancing payment settles any outstanding tax for the previous year, as Payments on Account may not have covered the total amount owed.

Can you avoid Payments on Account?

If more than 80% of your tax is collected through PAYE or if your total tax bill is less than £1,000, HMRC won’t require Payments on Account.

Late Payment and Interest

If you fail to make your Payments on Account by the deadline, HMRC will charge interest on the overdue amounts. The longer the payment is delayed, the more interest you’ll accrue, so it’s important to meet the deadlines.

Understanding Payments on Account can help you manage your tax liabilities more efficiently, reducing the risk of surprise bills and helping you budget throughout the year.

If you’re unsure about how much to pay or how to adjust your payments please do feel free to get in touch info@dominichill.co.uk or 01323 649 509.