If you’re a small business owner and submit Self Assessment tax returns, the UK tax system can feel daunting. One term that especially causes confusion is “payments on account”.

If you’re new to this concept, don’t worry. Let’s look at what payments on account are, how they work, why they matter and what they mean for you.

What Are Payments on Account?

Payments on account are advance payments you make twice a year towards your Income Tax and Class 4 National Insurance contributions if you’re self-employed or otherwise required to file a Self Assessment tax return.

Your payments on account are based on your previous year’s tax bill. HMRC uses that bill to estimate how much tax you may owe for the current year, which you then pay over two instalments.

This system helps taxpayers stay on top of their payments, reducing the risk of payment penalties and interest charged by HMRC. It can also support cash flow management by helping you avoid a single large tax payment at the end of the year.

When Do You Have to Make Payments on Account?

Not everyone has to make payments on account.

You will usually need to make payments on account if your last Self Assessment tax bill was more than £1,000 and less than 80% of your total tax was deducted at source, for example through PAYE.

How Do Payments on Account Work?

Payments on account are split into two instalments. The first payment is due by 31 January, alongside any balancing payment for the previous tax year. The second is due by 31 July.

Each instalment is typically 50% of your previous year’s tax bill.

For example, if your tax bill for the 2023/24 tax year was £4,000, you would need to pay £2,000 by 31 January 2025 and another £2,000 by 31 July 2025.

If your actual tax bill for the current year is higher or lower than expected, you may need to make a balancing payment, or you may receive a refund, once you file your Self Assessment return.

Managing Payments on Account

Managing payments on account effectively requires planning and organisation. Here are some practical tips to help you stay in control.

1. Budget for Payments in Advance

Start by calculating how much you are likely to owe in payments on account based on your previous year’s tax bill.

From there, you can work out how much to set aside each month so you are prepared for the January and July deadlines.

2. Keep Accurate Records

Maintain up-to-date records of your income, expenses and any changes in your financial circumstances.

If your income changes significantly, your payments on account may need to be adjusted.

3. Reduce Payments If Your Income Drops

If you know your income will be lower in the current tax year than it was in the previous one, your tax bill may also be lower. In that case, you can apply to HMRC to reduce your payments on account.

You can do this using the SA303 form or through your online Self Assessment account.

Be careful, though. If you reduce your payments too much, you may face a balancing payment with added interest.

4. Set Reminders for Deadlines

Mark the 31 January and 31 July deadlines in your calendar and set reminders to avoid missing payments.

Late payments can incur penalties and interest, so timely action is important.

What If You Can’t Afford Payments on Account?

If you’re struggling to make payments, it is important to act quickly. Contact HMRC as soon as possible to discuss your options.

A Time to Pay arrangement may allow eligible taxpayers to spread payments over a longer period, easing the immediate financial burden.

Need help with your business taxes? Get in touch with us. Let’s see how we can help with your payments on account.