Payments on account can make a Self Assessment payment larger than the tax bill you expected to settle. They are advance payments towards a later tax year, rather than another charge for the year you have just reported. The challenge is understanding which year each amount belongs to and preparing enough cash for the combined deadline.
In this article
- Check whether payments on account apply
- Review the calculation and payment dates
- Add commitments to your cash forecast
- Discuss significant income changes
The best starting point is your HMRC statement, supported by the tax calculation and a dated payment schedule. Looking only at last year’s profit or a bank balance can hide the next instalment.
Understand the three amounts
A balancing payment settles what remains for a completed tax year after payments already credited towards it. A first payment on account contributes towards the next bill and usually falls due on 31 January. A second payment on account usually falls due on 31 July. HMRC’s payment guidance sets out the timetable.
Payments on account include Class 4 National Insurance where relevant. They are generally based on half the previous year’s qualifying bill for each instalment. HMRC explains the exceptions, including when the previous bill is below £1,000 or more than 80% of the tax was paid outside Self Assessment, in its payments on account guidance.
Capital Gains Tax and student-loan amounts are not covered by these advance instalments in the same way; they may enter the balancing payment. Ask your preparer to identify what drives each amount instead of assuming every item on your return is included in the advance calculation.
Why the first January can feel unusually expensive
If you have not previously paid anything on account, you may need to settle the completed year’s bill and make the first advance payment at the same January deadline. This can be a larger cash commitment than a new sole trader has allowed for.
The issue is timing. Some of the money settles past income, while some is credited towards the following year. It does not mean HMRC has calculated the same year’s tax twice. The next return establishes the actual liability and the payments on account are then taken into consideration.
An illustrative cash timetable
Suppose a fictional taxpayer’s qualifying Self Assessment liability for a completed year is £4,000. Assume no tax has already been paid towards it, payments on account apply, and there are no other liabilities or credits. These figures demonstrate timing only, not accountancy fees or a forecast for your circumstances.
| Deadline | What the example taxpayer pays | Cash required |
|---|---|---|
| First January | Completed-year bill plus first advance instalment | £4,000 + £2,000 = £6,000 |
| Following July | Second advance instalment | £2,000 |
| Next January | Any balance for the following year plus its next advance instalment | Depends on the next return |
If the next year’s qualifying liability is £4,600, the two £2,000 instalments leave a £600 balance. The next January may therefore contain that balance as well as a new payment on account. If the liability falls, the account may instead show an overpayment, subject to other amounts due.
Turn the statement into a cash plan
Create a short schedule with the tax year, payment type, due date, amount, payments already made and balance remaining. Match your bank payments to the HMRC statement so a transfer is not assumed to be credited to the correct account without checking.
Work backwards from each deadline. Divide the remaining amount by the months or weeks left, then compare that reserve with expected receipts, normal spending and drawings. Use conservative collection dates where customers pay late. Keep the tax reserve visible; a separate pot can help you see what is available for ordinary spending.
Refresh the forecast when trading changes. Management accounts can provide a current view of profit, while a cash plan shows whether funds will be available on the required date. Profit and cash answer different questions, especially when invoices remain unpaid.
Can you reduce payments on account?
If you expect the relevant tax bill to be lower, you can ask HMRC to reduce the payments. A fall in sales alone is not enough evidence: other income, expenses and tax deducted elsewhere can affect the result. Prepare a reasonable estimate and retain the assumptions behind it.
HMRC permits a reduction request online or using form SA303. If you reduce too far and the final bill is higher, interest can be charged on the difference. See HMRC’s reduction instructions and warning before acting. A reduction should follow the expected liability, rather than being used simply to make an unaffordable payment disappear.
Review the estimate again if income recovers. A cautious decision in spring can become inaccurate after a strong second half of the year.
What if you cannot pay on time?
Act before the deadline where possible. Check the bill, remove any confusion about credits and contact HMRC about available payment arrangements. Weekly or monthly advance payments may help budgeting; HMRC describes its Budget Payment Plan, including eligibility and the need to settle any shortfall by the deadline. It is not the same as an agreement for overdue debt.
For help, share your tax calculation, HMRC statement and forecast with EPOS. Discuss tax support and agree whether the work covers a liability review, payment schedule or reduction request. See the pricing page for fee information and request a scoped quote.