Payments on account: what you need to know

Before payments on account were introduced back in 1990 many small businesses, sole traders in particular, were faced with the shock of receiving unexpectedly high annual tax bills that they couldn’t afford to pay. This usually happened because they hadn’t been putting away enough each month to cover their yearly tax bill.

To try to make this less of a problem, payments on account were introduced. So, what exactly are payments on account, when do you make them and how are they calculated?

In this guide you will find out:

• What payments on account are
• How payments on account are worked out
• What happens if you’re new to self assessment
• How to reduce payments on account

What are payments on account?

• Payments on account are payments in advance that you make towards your next self assessment tax bill, which includes income tax and Class 4 National Insurance contributions if you’re a sole trader.
• You make payments on account in two instalments, which spreads the total annual cost by splitting your total tax bill into two. It means you don't pay everything you owe in one annual payment, making your finances more manageable.
• The two payments on account must be paid before midnight on 31 January and 31 July.
• You don’t have to make two payments on account if you owed less than £1,000 in tax last year or you paid more than 80% of the tax you owed outside of self assessment (eg through your tax code via employed payroll)

How are payments on account worked out?

Payments on account are based on estimated earnings for the current tax year, based on your earnings in the previous year. Normally, each payment on account is half of your previous annual self assessment tax bill.

• If you earn more during the tax year than estimated, more tax will be payable. This means you’ll need to make a "balancing payment".
• This will include any tax you owe for capital gains or student loan repayments if you’re a sole trader.
• Your balancing payment must be paid before midnight on 31 January the following year.
• If you earn less than the estimated amount, you may be able to claim a tax refund. Alternatively, the overpayment will be deducted from your next tax payment/bill.

An example of payments on account

Let's assume your total tax bill for the tax year is £4,000. Based on your lower earnings the previous year, you made two payments on account of £1,000 each (ie £2,000 in total), one on 31 January and the other on 31 July. Because these two payments on account were less than the tax that you actually owed, a balancing payment of £2,000 must be paid, plus the first payment on account of £2,000 towards your next tax bill, giving a total of £4,000. A second payment on account of £2,000 must be paid on 31 July 2025.

If you didn't make payments on account last year…

If you didn’t file a self assessment tax return for the previous tax year, you won’t have made any payments on account. That means that you’ll have to pay both the full amount of your estimated tax bill as well as your first payment on account towards your next bill. You should be prepared for this, because there is no way around it.

Reducing payments on account

Things do not always pan out as expected in business, which can mean that you have a few lean months where your income is lower than expected. As a consequence, your annual tax bill will obviously be lower. To ease your cash flow, you can ask HM Revenue and Customs (HMRC) to adjust your payments on account, so that they’re lower.

It’s easy enough to reduce your payments on account, especially if you do it online by signing in to your online account. There’s an option that allows you to "View your latest Self Assessment return". Select that option, then "Reduce payments on account".

Copyright 2025. Sponsored post by Mike Parkes of GoSimpleTax - tax return software that can help you manage your self assessment.