The short version: Payments on Account are advance payments towards your next tax bill. If you’re self employed or have significant untaxed income, HMRC wants you to pay tax in instalments rather than one big lump sum.
How does it work?
When you file your first Self Assessment and your tax bill is above a certain amount, you pay the full bill plus 50% extra as an advance on next year. Then in July, you pay another 50%. The following January, you settle up with a balancing payment (or get a refund if you overpaid).
Why does HMRC do this?
They don’t want to wait a whole year to collect tax on your self employment income. Payments on Account spread the burden and reduce the risk of people not paying.
Can it catch you out?
Absolutely. Your first Self Assessment can feel brutal when you’re paying 150% of your tax bill. Plan ahead and set money aside throughout the year.
Can you reduce them?
If you know your income will be lower next year, you can ask HMRC to reduce your Payments on Account. But be careful. If you get it wrong, you’ll face interest charges.
First Self Assessment coming up and worried about the bill? Let’s plan together so there are no surprises.
