Payments on Account are one of the most confusing parts of Self Assessment.
They are also one of the main reasons someone’s first significant January tax payment can be much larger than expected.
The good news is that the principle is relatively straightforward once you understand what HMRC is doing.
What is a Payment on Account?
A Payment on Account is an advance payment towards your next Self Assessment tax bill.
Rather than waiting until the end of the following tax year to collect everything, HMRC asks qualifying taxpayers to make two advance payments.
They are normally due:
- 31 January
- 31 July
Each payment is normally based on half of the relevant previous year’s Self Assessment liability.
Why can the first January payment be so large?
Consider a simplified example.
A sole trader completes their 2025/26 tax return and has £6,000 to pay.
If no Payments on Account have previously been made, that £6,000 is payable by 31 January 2027.
However, HMRC may also ask for the first Payment on Account towards 2026/27.
If that payment is £3,000, the total due in January becomes:
2025/26 tax: £6,000
First Payment on Account: £3,000
Total payable: £9,000
A further £3,000 would then normally be due on 31 July 2027.
This is often where the surprise comes from.
The person’s annual tax bill hasn’t suddenly become £9,000.
Part of the payment relates to the next tax year.
Do Payments on Account apply to everybody?
No.
Broadly, they are normally not required where the relevant Self Assessment liability is below £1,000 or where most of the tax has already been collected at source, for example through PAYE.
The exact position depends on the individual’s circumstances.
What happens when the next tax return is prepared?
The Payments on Account are credited against the actual liability for the year.
Suppose you have paid £6,000 on account towards 2026/27 but the actual liability turns out to be £7,000.
You would normally have a further £1,000 balancing payment to make.
If the actual liability was lower, the overpayment can be dealt with through your tax account.
Can Payments on Account be reduced?
Potentially.
If you have a genuine reason to believe your next tax liability will be lower, you can apply to reduce the Payments on Account.
For example, business profits may have fallen significantly.
But this needs to be considered carefully.
If Payments on Account are reduced too far and the eventual liability is higher, HMRC can charge interest on the underpaid amount.
Reducing the payment because you expect profits to fall is very different from reducing it simply because you would rather not pay it.
Why early Self Assessment helps
This is another reason to prepare your tax return early.
If your return is completed in September, you can see the January liability and any Payments on Account several months before payment is required.
That gives you time to understand the figures and plan the cash flow.
Payments on Account are much less unpleasant when you know they are coming.
