What is payment on account? HMRC’s advance tax system explained
Payment on account for Self Assessment can be confusing. In this article, we break it down so you can make tax payments with confidence and ease.
Payment on account is HMRC’s system for collecting Self Assessment tax in advance. Instead of paying your full tax bill once a year, you make two payments based on your previous year’s bill.
If you’ve received a higher-than-expected tax bill, payment on account is often the reason.
This guide explains exactly what payment on account is, how HMRC calculates it, when the deadlines fall, and what you can do if you think you’re going to overpay.
Key takeaways: payment on account explained
- Payment on account means paying your Self Assessment tax in two advance instalments
- Each payment is based on 50% of your previous year’s tax bill
- Payments are due on 31 January and 31 July each year
- You may need to make a balancing payment if your actual tax bill is higher
- You can reduce payments if your income drops, but interest may apply
What is payment on account?
Payment on account is the system HMRC uses to collect income tax in advance. Instead of paying your entire tax bill in January each year, you make two payments across the year — each one equal to half of the previous year’s bill. The idea is that you pay tax closer to when you earn the income, rather than more than a year in arrears.
These advance payments count towards your final bill. When you file your return and HMRC calculates what you actually owe, you’ll either pay a balancing amount (if you owe more than you’ve already paid) or receive a refund (if you’ve paid too much).
Why do I have to pay tax in advance?
HMRC requires advance payments to spread tax costs across the year and reduce the risk of large, unexpected bills. HMRC introduced payments on account to spread the collection of tax throughout the year and reduce the risk of large, unpaid bills accumulating. Before self assessment was introduced in 1996/97, tax was collected differently — often in a lump sum well after the income had been earned. The advance payment system is designed to keep the tax you owe more in line with when you actually earn the money.
It’s also worth noting that employees in PAYE employment pay tax in real time through each payslip — payments on account are, in effect, the self-employed equivalent of that. The system kicks in once your tax bill exceeds £1,000 in a year, and at least 80% of your tax isn’t already being collected at source through PAYE.
Who needs to make payments on account?
You need to make payments on account if your Self Assessment tax bill is over £1,000 and less than 80% of your tax is collected through PAYE.
Payment on account applies mainly to self-employed individuals, landlords, and anyone who completes a Self Assessment tax return.
If your bill is below this threshold, or most of your tax is already deducted at source, you won’t need to make advance payments.
When did payment on account start?
Payment on account was introduced as part of the UK Self Assessment system to modernise how tax is collected from self-employed individuals.
The self-assessment system — including payments on account — was introduced in the UK for the 1996/97 tax year, following changes set out in the Finance Act 1994. The government’s intention was to modernise how HMRC collected tax from those with more complex financial affairs: the self-employed, landlords, and those with multiple income sources.
The broad structure of the system hasn’t changed significantly since then, though thresholds and administrative processes have been updated over the years. Making Tax Digital, which rolls out for most sole traders from April 2026, will change how returns are filed — but the payment on account system itself is expected to continue.
How is payment on account calculated?
The calculation is straightforward: take your Self Assessment tax bill from the previous tax year and divide it by two. Each of your two payments on account equals half of that figure.
- Previous year’s bill: £3,600
- First payment on account (due 31 January): £1,800
- Second payment on account (due 31 July): £1,800
- Total paid in advance: £3,600
If your actual bill for the year turns out to be more than £3,600, you’ll make a balancing payment. If it’s less, you’ll be refunded the difference.
Payments on account apply only to income tax and Class 4 National Insurance. Capital Gains Tax and certain other charges are excluded — those are paid as part of your balancing payment in January.
When do you make payments on account?
You make two payments on account each year, with deadlines in January and July.
There are two deadlines each year:
- 31 January: your first payment on account for the upcoming tax year, plus any balancing payment owed from the previous year.
- 31 July: your second payment on account for the current tax year.
You don’t have to make payments on account if your previous year’s tax bill was less than £1,000, or if at least 80% of your tax is collected through PAYE. If either of those applies to you, you’ll just pay your full bill in January each year.
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How payment on account works in simple terms
Payment on account is based on your previous year’s tax bill and split into two equal payments. These payments count towards your final bill for the current tax year.
Payment on account example: how it works in practice
Say you completed your first Self Assessment return for 2021/22 and your bill came to £800. Because it was under £1,000, no payments on account were required for the following year.
The next year, 2022/23, your profits grew and your bill came to £2,400. Because it’s now above £1,000, the payment on account process kicks in for 2023/24:
- 31 January 2024: pay £2,400 (your 2022/23 bill) plus £1,200 (first payment on account for 2023/24)
- 31 July 2024: pay a further £1,200 (second payment on account for 2023/24)
When you file your 2023/24 return and your actual bill comes to £2,000, you’ve already paid £2,400 on account — so HMRC owes you a £400 refund. Your payments on account for 2024/25 are then based on the £2,000 bill, so £1,000 each.
Read more on Self Assessment:
How do you pay payments on account?
HMRC accepts payment through several methods. For same or next-day processing, you can pay by online banking, CHAPS, or debit card through the HMRC portal. Personal credit cards aren’t accepted, but corporate credit cards are.
If you want to spread the payments further, HMRC’s Budget Payment Plan lets you make regular weekly or monthly payments towards your bill throughout the year. The amounts you’ve paid are credited against your next bill. This works well for people who find it easier to budget in smaller, regular amounts rather than two large payments.
Setting up a direct debit with HMRC is another option — they’ll tell you the amount and date in advance. Allow five working days for a direct debit to process the first time you set one up.
What happens if you don’t pay payments on account?
If you miss a payment on account deadline, HMRC may charge interest on the outstanding amount and apply penalties depending on how late the payment is.
Paying on time is important to avoid additional costs and disruption to your tax account.
How to reduce payments on account
All business income can fluctuate from year to year.
If you know your tax bill is going to be lower than the previous year, say for example you have fewer clients or your tax relief has gone up, you can avoid overpaying tax by asking HMRC to reduce your payments on account.
You can choose to do this online or by post.
To do this online, sign into your online account. Select the option to view your latest Self Assessment return, and then select ‘reduce payments on account’.
To apply by post, fill out the SA303 form on screen, print it, and send to the tax office.
Do think carefully before you reduce your payment on account because if it turns out you’ve underpaid, you’ll have to pay interest on the outstanding amount, which can increase your tax bill significantly.
What if you’ve overpaid?
If you’ve paid too much tax through payments on account, HMRC will either refund the difference or apply it to your next bill.
If your actual tax bill is lower than the amounts you’ve paid on account, HMRC will show a credit on your account when you file your return. You can choose to have this refunded — by bank transfer or cheque — or leave it as a credit towards your next payment on account.
The refund process happens automatically once your return is processed. If you’re expecting a refund and it hasn’t appeared after a few weeks, you can check the status through your HMRC online account.
How to plan for payments on account and avoid surprises
Payment on account catches a lot of people off guard the first time they encounter it — particularly the January bill, which can feel like being asked to pay for two tax years at once. The best defence is to know it’s coming and set money aside throughout the year.
A rough rule of thumb: if you’re self-employed and your profits are growing, set aside around 25–30% of your net profit tax. That covers income tax, National Insurance, and gives you a buffer for the payments on account. Once you’ve been through the cycle once or twice, it becomes much easier to anticipate.
If you’re working with an accountant, ask them to give you a forecast of your payment on account at the start of each tax year — it should be one of the first things they calculate once your previous return is done.
Editor’s note: This article was first published in January 2023 and has been updated for relevance.
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