Quick answer:
Payments on account are advance payments towards your next year’s tax bill, each equal to half of your previous year’s tax liability, due on 31 January and 31 July, which means in your first year of higher earnings you can face roughly 150% of a year’s tax in one January: the balance for last year plus the first payment on account for this year.
This is the single most shocking surprise in self-employment. Here’s how it works and how to prepare.
What are payments on account?
HMRC asks most self-employed people to pay towards next year’s tax in advance, in two instalments. Each payment on account is 50% of your previous year’s tax bill, on the assumption you’ll earn similarly. They’re due 31 January (alongside your balancing payment) and 31 July.
Why is the first January so painful?
The crunch hits when your tax bill rises. In that January you pay:
- The balancing payment for the year just ended, plus
- The first payment on account (50%) for the current year
That can total around 150% of a single year’s tax in one go for some people; your exact figure depends on your circumstances, so check yours rather than assume. Many newly self-employed people don’t see it coming. See how to budget for it in how much tax to set aside.
When don’t payments on account apply?
You generally won’t make them if your last tax bill was below a small threshold, or if most of your tax is collected at source (for example, through PAYE). If your income drops, you can apply to reduce your payments on account, but reduce them too far and HMRC charges interest.
How does MTD change this?
MTD’s quarterly reporting doesn’t remove payments on account, but it does mean you always know your position rather than discovering it in January. Continuous visibility is the antidote to the payments-on-account shock. See Self Assessment vs MTD.
How CleanBooks AI helps you prepare
CleanBooks AI keeps a live tax estimate and can help you plan your set-aside so that January, payment on account included, is fully funded, not a panic. Paired with cash-flow forecasting, you see the bill coming with months to spare. See real-time tax estimates and real-time cash flow forecasting.
Never be ambushed by January again. Plan ahead with CleanBooks AI free, 6 months free, no credit card.
