Payment on account–who needs to pay and how are they calculated
Payments on account can feel like an unwelcome surprise when your Self Assessment bill arrives. If you’re self-employed, a partner in a partnership, or a sole trader in the UK, HMRC may expect you to pay part of next year’s tax bill before you’ve even filed your return. Understanding who needs to pay, and how these figures are calculated, can help you plan ahead and avoid unnecessary stress.
What are payments on account?
Payments on account are advance instalments towards your next year’s Self Assessment tax bill. They’re HMRC’s way of collecting tax throughout the year, rather than waiting for a lump sum payment on the following January 31st.
If your previous year’s tax bill (including both income tax and National Insurance contributions) was £1,000 or more, you’ll typically be required to make two equal payments on account. These are due on 31 January during the tax year and 31 July following the end of the tax year. For example, for the 2024/25 tax year, payments would be due on 31 January 2025 and 31 July 2025.
Who has to pay?
Not everyone is required to make payments on account. You’ll need to pay if your previous year’s tax liability was £1,000 or more. This threshold has remained unchanged for several years, making it applicable to most small business owners with a reasonable level of profit.
However, there are exceptions. You won’t need to pay on account if:
- Your previous year’s tax bill was under £1,000
- You’re a new business owner (no payment on account is due for your first year of trading)
- You’ve notified HMRC that you expect your tax bill to be significantly lower in the coming year
- You’ve recently ceased self-employment
If you fall into any of these categories, it’s worth keeping documentation to support your position, particularly if your circumstances have changed materially.
How are they calculated?
The calculation is straightforward. Each payment on account equals 50% of your previous year’s tax liability. So if you paid £2,000 in tax last year, each payment on account will be £1,000 (totalling £2,000).
Here’s a practical example: suppose your 2023/24 Self Assessment bill was £3,500. For 2024/25, you’d make two payments of £1,750 each—one on 31 January 2025 and another on 31 July 2025.
When you file your 2024/25 return in January 2026, HMRC will calculate your actual tax liability. If the actual bill is higher than the two payments combined, you’ll owe the difference. If it’s lower, you’ll receive a refund (or have the credit carried forward).
Can you adjust your payments?
Yes, you can apply to reduce your payments on account if you expect your tax bill to be significantly lower. This is known as a “claim to reduce payments on account.” You’ll need to justify the reduction—for instance, if your business revenue has dropped considerably or you’re winding down.
You can make this claim online through your Self Assessment account, by letter, or by telephone. However, be cautious: if your claim is successful but your actual profits turn out to be higher than expected, you could face an underpayment and potentially interest charges.
It’s also possible to increase your payments voluntarily if you expect a higher bill. Whilst this isn’t compulsory, it can help spread the financial burden more evenly and reduce the risk of a large bill later.
Planning ahead
Payments on account can take many business owners by surprise, particularly in the early years of trading. A simple solution is to set aside money each month equivalent to your anticipated tax liability, divided by twelve. This approach smooths out the cash flow impact and ensures you’re not caught short when payments fall due.
If your business is seasonal or your profits fluctuate significantly year to year, keeping close tabs on your quarterly accounts can help you anticipate changes in your tax bill and adjust your payments accordingly.
Final thoughts
Payments on account are a standard part of the UK tax system, but they needn’t be daunting. By understanding the rules, calculating your liability accurately, and planning ahead, you can manage them confidently and keep your business finances on track.
For tailored advice, contact Severn Accounting — we’re here to help.