20 Oct What is Payment on Account – How Does It Work?
The Payment on Account system by HMRC can be confusing, especially for new self-employed individuals or small business owners submitting their taxes via Self-Assessment. In this article, we break down everything you need to know about Payment on Account, how it works, and how you can manage your payments effectively.
What is Payment on Account?
Payment on Account is an advance tax payment system designed for those who file their taxes through Self Assessment. HMRC estimates your tax liability for the upcoming year based on your previous tax bill and requires you to pay this estimated amount in two equal instalments.
Who Needs to Make Payments on Account?
Usually, self-employed taxpayers need to make payments on account for next tax year. Although, you are required to make payments on account if:
- Your last Self Assessment tax bill was more than £1,000.
- Less than 80% of your total tax was deducted at source through PAYE.
If you meet these conditions, you must make advance payments towards your next tax bill.
Payment Deadlines and Methods
The two key deadlines for Self-Assessment tax payments are:
- 31 January– Payment of any remaining tax for the previous year + 1st Payment on Account for next year
- 31 July– 2nd Payment on Account
- You can pay using online banking, CHAPS, Bacs, or set up a Direct Debit to ensure timely payments.
- A Budget Payment Plan is also available via HMRC, allowing you to make regular weekly or monthly payments.
Missing a payment deadline can result in interest charges and penalties from HMRC.
Can You Reduce Your Payment on Account?
If you expect your income to be lower this year—due to fewer clients, increased tax relief, or other reasons—you can request HMRC to reduce your Payment on Account.
- You can do this online via your HMRC account or by submitting the SA303 form by post. If you or your accountant uses software for self-assessment tax returns, you can reduce your payments on account by selecting Box 10 in Tax Calculation Summary.
- Be cautious! If you reduce your payments too much and end up owing more, HMRC will charge you interest on the shortfall.
What Happens If You Overpay?
In case your tax bill this year is less than the total amount of payments on account you paid last year, you can claim a tax refund.
- Overpayments are processed automatically when you submit your Self-Assessment tax return.
- You can choose to receive a bank transfer, cheque, or apply the overpaid amount toward future tax payments.
Understanding Payment on Account is essential for managing your cash flow and avoiding unexpected tax bills. To stay on top of your payments:
- Plan ahead for your tax obligations
- Check if you qualify for a Payment on Account reduction
- Prepare your self-assessment tax return early
Example of How Payment on Account Works
Let’s say:
- Your bill for the 2024 to 2025 tax year is £4,000.
- In the 2023/24 tax year, your total tax bill was £2,000 and you made 2 payments on account of £1,000 each.
- The 2 payments on account did not cover the tax of 2024/25, meaning you must pay as follows:
- £2,000 for tax of 2024/25 tax year, by 31/1/2026
- £2,000 for 1st payment on account, by 31/1/2026
- £2,000 for 2nd payment on account, by 31/7/2026
- If your actual tax bill for 2024/25 was £2,000, then you have nothing to pay for 2024/25, as the tax owed has been covered from last year’s payments on account.
- Finally, if your 2024/25 tax bill was £1,800 then you have overpaid by £200, which you can either claim as a refund or offset against your next tax bill.
For professional tax advice and support, our team of experts is here to help!