Payments on Account: why your January tax bill is bigger

What HMRC means by a payment on account

A payment on account is not a late penalty, a duplicate bill or a charge for filing a return. It is an advance payment towards the next tax year’s Self Assessment liability, including Class 4 National Insurance for a self-employed person where relevant. HMRC’s current guidance says there are normally two instalments and each is half of the tax owed in the previous year.

The system tries to spread the cash cost of tax across the year after your first substantive Self Assessment bill. It can feel harsh because the first 31 January on which payments on account arise may bring two different liabilities together: the balancing payment for the tax year you have just filed and the first payment on account for the tax year that is already under way. The second payment on account then falls on 31 July.

The key distinction is between the prior-year final bill and the current-year advance. If the current year turns out to be more profitable than the previous year, the two advances may not cover the final bill and there can be a balancing payment the following January. If it turns out to be lower, the payments may be too high and an adjustment or refund may be due after the return is finalised.

When payments on account are usually required

HMRC says payments on account are normally required unless the tax owed in the previous year was less than £1,000, or more than 80% of the tax was collected outside Self Assessment. Tax collected through a PAYE code is one example of tax collected outside Self Assessment. The exact entries on the calculation and statement matter, so do not decide from turnover, profit or a social-media rule of thumb.

Your online account or Self Assessment statement shows whether HMRC has calculated payments on account and the amounts due. A first-time filer can be caught out because they may need to pay the full amount for the year they have just completed plus the first advance for the following year. This is a timing effect, not evidence that HMRC has taxed the same income twice.

Different types of income can complicate the picture. Capital gains, student-loan amounts and other adjustments can affect the balancing payment without necessarily being the basis for the next advance in the way a reader expects. Use the official calculation and ask an accountant or HMRC if you cannot trace the numbers to the statement.

The dates and the cash-flow problem they create

HMRC’s current payments-on-account guidance gives midnight on 31 January and midnight on 31 July as the normal due dates. The January date can also be the deadline for a balancing payment. It is therefore useful to treat the January amount as a bundle: first finish the prior-year calculation, then identify any remaining prior-year tax, then identify the first advance for the next year.

Do not wait until the return is ready to see the number for the first time. A practical tax reserve records receipts and costs throughout the year, but it should also show the dates on which cash may be needed. If your trading is seasonal, a July payment may arrive at the weakest cash point rather than the point at which you feel most profitable.

A cash forecast should include payment-on-account dates as known outflows and should not rely on a new customer, credit limit or future tax refund to make the date work. If the payment is unaffordable, use HMRC’s current support route and obtain professional advice early. This guide explains the mechanism; it cannot assess an individual arrangement or tax calculation.

Reducing an instalment: when it is sensible and when it is risky

HMRC allows a claim to reduce payments on account when you expect the tax due to be lower. Its guidance gives examples including lower business profits or other income, higher tax relief, or more tax deducted at source than in the previous year. The claim can be made online or using form SA303, and HMRC’s guidance says it must be made by 31 January after the end of the relevant tax year.

A reduction should come from an updated, evidenced estimate, not from a wish that the business will have a quieter year. Start with year-to-date income and costs, identify what has actually changed, consider other income and reliefs, and keep the calculation with your records. A seasonal business should be especially cautious about treating a quiet quarter as an annual outcome.

If you reduce an instalment too far and the final tax bill is higher than expected, HMRC says interest can be charged on the difference. The decision is therefore a trade-off between preserving cash now and being confident enough in the revised projection. If the calculation includes unusual income, capital gains, a change of business structure or a large relief, get qualified help before changing the amount.

A simple way to plan rather than panic

Keep three labels in your tax working file: ‘prior-year balance’, ‘next-year first payment on account’ and ‘next-year second payment on account’. Add the amount and date from the HMRC statement beside each label. This stops the common error of treating every January figure as one tax year’s final bill.

Then compare the payment calendar with the cash forecast. If an amount is covered by the reserve, mark it as protected and do not use it for owner drawings or a discretionary purchase. If a gap appears, verify the calculation before deciding whether a reduction is justified, whether a commercial decision can be changed, or whether you need to contact HMRC and an adviser. Visibility is more useful than a generic saving percentage.

What to do, in order

1. 1

   Read the calculation and statement together

   Identify the prior-year balancing payment and each payment on account separately; do not rely on a single total shown in an email or calendar.

2. 2

   Put both due dates in the cash forecast

   Add 31 January and 31 July where applicable, along with any tax reserve already held, before making decisions about drawings or discretionary spending.

3. 3

   Reforecast the current tax year from evidence

   Use current income, costs, known changes, other income and available relief information; keep the workings with the tax records.

4. 4

   Reduce only where the evidence supports it

   Use HMRC’s online route or SA303 only when a lower final amount is genuinely expected, and understand that interest may apply if the reduction is too large.

5. 5

   Act early on an unaffordable date

   Confirm the bill, contact HMRC where appropriate and seek professional help; do not present a credit application as a substitute for a tax-payment plan.