If you’ve recently received a letter from HMRC requesting a ‘payment on account’, you might be wondering what this means. The good news is it’s not a penalty or fine – it’s one way HMRC collects tax in advance.
Learning what these payments are, who needs to make them, and when they’re due can help you stay compliant with HMRC requirements.
Learning what these payments are, who needs to make them, and when they’re due can help you stay compliant with HMRC requirements.
What is a payment on account?
A payment on account is an advance payment towards your next year’s income tax and National Insurance contributions. HMRC may require these payments if you owe a significant amount of tax that isn’t collected through PAYE or at source.
Rather than waiting until the end of the year to collect all your tax, HMRC spreads the cost by taking advance payments based on your previous year’s tax bill. For example, if you owed £3,000 in tax last year, HMRC might assume you’ll owe the same amount this year and request two instalments of £1,500 during the current tax year.1 (external link)
Who has to make a payment on account?
You may need to make payments on account if:
- Your last Self Assessment bill exceeded £1,000.
- Less than 80% of your tax was collected at source (e.g., through PAYE).
- You’re registered for Self Assessment.
- You’re not a company (which have different corporation tax rules).
Many self-employed individuals, business partners, and people with significant income outside PAYE have to make payments on account.
You can read our guide for more information on self-employed taxes.
When are payments on account calculated?
| Payment | Due date | Description |
| First payment on account | 31 January | 50% of the previous tax year's total bill |
| Second payment on account | 31 July | The remaining 50% of the previous year's bill |
| Balancing payment | 31 January (the following year) | Any remaining tax owed after payment of account |
The January payment is typically due at the same time as your Self Assessment submission deadline, while the July payment falls in the middle of the tax year you’re paying for.
Read our guide to tax dates for small businesses.
How are payments on account calculated?
When calculating your payments on account, HMRC uses a 50/50 split of your previous year’s tax bill. They take your income tax and Class 4 National Insurance from last year’s Self Assessment and divide it equally between two payments.
For example:
- Previous year’s income tax: £4,000.
- Previous year’s Class 4 NI: £2,000.
- Total tax bill: £6,000.
- First payment on account (31 January): £3,000.
- Second payment (31 July): £3,000.
This example assumes your current year's income will be similar to the previous year. If your actual tax bill is more or less, you’ll typically either pay the difference or get a refund when you submit your Self Assessment.2 (external link)
HMRC’s calculation is outlined in their Self Assessment guidance (external link).
Can you reduce a payment on account?
You can apply to reduce your payments on account if you expect to earn significantly less than the previous year or have reasons to believe your tax bill will be lower.
HMRC allows reductions through your Self Assessment online account or by contacting them directly. However, if you reduce payments too much and end up owing over £1,000 when you file your return, you may be charged interest on the owed amount.
If you are unsure, you can consult a tax professional before making changes to your payments on account to ensure you comply with HMRC requirements.
Disclaimer:
At Hiscox, we want to help your small business thrive. Our blog has many articles you may find useful as your business grows. But these articles aren’t professional advice. So, to find out more about a subject we cover here, please seek professional assistance.
Related articles and guides
