Payments on Account Explained

What Are Payments on Account?

Payments on account are advance payments towards your next tax bill. If you pay tax through Self Assessment, HMRC usually asks you to pay part of next year's bill early, in two instalments, rather than all of it in one go after the year has ended.

Each payment is normally half of your previous year's Self Assessment tax bill. They cover Income Tax and Class 4 National Insurance. They do not include Capital Gains Tax or student loan repayments, which are paid with your balancing payment instead.

The Key Dates

Who Has to Make Payments on Account?

You will usually have to make them if you file a Self Assessment tax return. You do not have to make payments on account if either of these applies:

• Your last Self Assessment tax bill was less than £1,000.
• You have already paid more than 80% of all the tax you owe at source, for example through PAYE on your wages or pension.

This is why many employees with a small amount of extra income, such as a little rental income or side work, never see payments on account at all.

Why the First Year Feels So Expensive

The big surprise comes in your first year of Self Assessment. On the same 31 January you pay the whole bill for the year that has just ended, and then the first payment on account for the year you are already in.

The Balancing Payment

Once the tax year is over and you file your return, HMRC compares the tax you actually owe with the payments on account you have already made. If you paid too little, you pay the difference as a balancing payment by 31 January. If you paid too much, the extra can be refunded or set against your next bill.

Can You Reduce Your Payments on Account?

Yes. If you expect your income to fall, for example because you have stopped trading, taken on less work or started a job where more tax is taken through PAYE, you can ask HMRC to reduce them. You can do this in your HMRC online account or by sending form SA303.

What Happens If You Pay Late?

HMRC charges interest on late paid tax at the Bank of England base rate plus 4%, worked out daily from the day after the deadline. Late payment penalties can also apply to the tax you owe for the year. If you cannot pay in full, contact HMRC before the deadline, as you may be able to set up a payment plan.

How to Pay

1. Online or telephone banking, using your Self Assessment payment reference, which is your Unique Taxpayer Reference followed by the letter K.
2. Debit card through GOV.UK.
3. Budget Payment Plan, which lets you pay regular amounts by Direct Debit towards your next bill if you are up to date with previous payments.

New to all of this? Start with our guide for people new to Self Assessment.