What is payment on account?
Payment on account catches a lot of sole traders off guard. Here's what it is, how it's calculated, when you pay it, and what to do if your income drops.
6/18/20262 min read
What is payment on account?
If your first self assessment tax bill was higher than you expected, payment on account is probably why. It catches a huge number of sole traders off guard - and once you understand how it works, it's much easier to plan for.
The basic idea
Payment on account is HMRC's system of collecting tax in advance. Rather than waiting until January to collect everything you owe, HMRC asks you to make two advance payments towards your next year's tax bill during the year itself.
These payments are based on your previous year's tax liability. HMRC assumes your income will be roughly the same next year, so it asks you to pay half of last year's bill in January and the other half in July.
Why does it make January so expensive?
This is the part that catches people out. On 31 January, you don't just pay the tax you owe for the year just gone. You also make your first payment on account towards the following year - all in one go.
So if your 2024/25 tax bill came to £3,000, you'd pay:
• £3,000 - the balancing payment for 2024/25
• £1,500 - the first payment on account for 2025/26
That's £4,500 due in one month. Then a further £1,500 in July. It's a lot, and it's why setting money aside throughout the year matters so much.
When are the payments due?
The deadlines are the same every year:
• 31 January - first payment on account (due at the same time as your balancing payment for the previous year)
• 31 July - second payment on account
Does everyone have to pay it?
No. Payment on account only applies if both of the following are true:
• Your total tax bill for the year was more than £1,000
• Less than 80% of your tax was collected at source through PAYE
If your bill was under £1,000, or most of your income is taxed through employment, you won't need to make payments on account.
It also doesn't apply in your first year of self-employment - you'll pay the full amount in January for year one, and then payments on account kick in from year two onwards.
What if my income is lower this year?
You can apply to reduce your payments on account if you expect your income to be lower in the current tax year. You can do this online through your HMRC account or by submitting form SA303.
Be realistic if you do this. If you reduce your payments and your income turns out to be higher than expected, HMRC will charge interest on the shortfall from the original due date. Reducing payments just to improve cash flow in the short term isn't a good idea if your income hasn't actually fallen.
How to plan for it
The single most useful thing you can do as a sole trader is set aside money for tax as you go. A common rule of thumb is 25-30% of your profit, set aside each month into a separate account. That way, January and July don't come as a shock.
If you're in your first or second year of trading, it's worth doing a rough calculation of what your payments on account will be before January arrives - your accounting software or tax filing tool should show you this as you complete your return.
You can browse tax filing software options in our Tax Filing Software directory.
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