Self Assessment payments on account: why your January bill can be bigger

What are payments on account?

Payments on account are advance payments towards your next Self Assessment bill. They generally apply unless the previous bill is below £1,000 or more than 80% of the tax was collected outside Self Assessment. Check the actual calculation rather than assuming every self-employed person pays them.

Each instalment is normally half the relevant previous-year amount. Some liabilities, such as Capital Gains Tax, are not included in the same way. Your statement and tax calculation show how the figures fit together.

An example of a first January bill

Suppose the relevant tax and Class 4 National Insurance bill is £4,000, none has been paid through earlier payments on account, and the rules require payments for the next year. On 31 January, the amount due could be £4,000 for the completed year plus a £2,000 first payment on account. A second £2,000 would normally fall due on 31 July.

That £6,000 January payment is not a tax rate of 150%. It combines two periods. This illustration leaves out other taxes and adjustments; use your own calculation to establish the exact amount.

What happens when the final bill is known?

The advance payments are set against the eventual bill for the relevant year. If that bill is higher, a balancing amount may be due. If it is lower, you may have overpaid.

Keep the accounting year, tax year and payment dates clearly labelled in your forecast. Otherwise a July payment can look like an unexpected new charge when it was already part of the annual cycle.

Can you reduce payments on account?

You can ask to reduce them if you expect the relevant liability to be lower. A fall in profit or a change in other income may justify reviewing the estimate. Keep a calculation supporting the request.

Reducing payments is not a way to postpone a bill you know will arise. HMRC can charge interest if reduced payments turn out to be insufficient. When income is uncertain, compare a cautious forecast with a stronger trading scenario before deciding.

A practical way to budget

Build the tax estimate into your routine records, then refresh it during the year.

• Reconcile trading income and costs regularly.
• Separate tax savings from day-to-day spending money.
• Record January, July and any balancing payments in your cash forecast.
• Check HMRC’s statement after filing and after making a payment.
• Review the forecast when profit or other income changes.
• Seek help early if the payment looks unaffordable.

Keep MTD and payment dates separate

Making Tax Digital reporting introduces another timetable for some taxpayers. It does not mean the usual payment obligations disappear. Keep a calendar with separate entries for reporting and paying.

Our self-employed accounting support can help connect accounts, the return and a forward estimate, so the amount you set aside reflects your circumstances rather than a percentage copied from someone else.