In a nutshell
HMRC uses a ‘Payments on account’ system to collect tax from self-employed people who submit Self Assessment returns.
Essentially, it’s a way that HMRC collects tax not only for the current tax year, but also for the next. Payments on account only apply to self-employed people if their total tax bill exceeds £1,000 for their last tax year.
It’s best to understand through an example.
An example of Payments on account
Let’s assume you opened your business on 1st September, 2023 and so your first tax year fell into the 2023-2024 tax year. This is how your payments on account will work.
- Tax year 1: 2023-2024 (first time you hit payments on account)
- You complete your self-assessment tax return for 2023-2024 before the 31st January 2025 deadline and get a tax bill of £1,000.
- 31st January, 2025
- By 31st January, 2025, HMRC will tell you that you need to pay a total of £1,500 which consists of:
- £1,000: Your ‘balancing payment’ / full tax bill for the 2023-2024 year.
- £500: Your first ‘payment on account’ (50% of your balancing payment) towards the next year (2024-2025). This is essentially what a ‘payment on account’ is.
- By 31st January, 2025, HMRC will tell you that you need to pay a total of £1,500 which consists of:
- 31st July, 2025
- By the 31st July following the end of the tax year, you’ll need to pay your second ‘payment on account’ of £500 (50% of £1,000).
- Tax year 2: 2024-2025
- You complete your self-assessment tax return for 2024-2025 before the 31st January 2026 deadline and get a tax bill of £1,200.
- 31st January, 2026
- Although your tax bill is £1,200, you already paid £1,000 via payments on account (see Tax year 1 above) so you’ll need to pay £800 by 31st January, 2026 which consists of:
- £200: Your balancing payment of £1,200 (full tax bill for 2024-2025) – £1,000 (payments already made via payments on account from 2023-2024)
- £600 (50% of your tax bill of £1,200 for 2024-2025) as your first payment on account towards the next year (2025-2026).
- Although your tax bill is £1,200, you already paid £1,000 via payments on account (see Tax year 1 above) so you’ll need to pay £800 by 31st January, 2026 which consists of:
- 31st July, 2026
- By the 31st July following the end of the tax year, you’ll need to pay your second ‘payment on account’ of £600 (50% of £1,200) towards the next tax year (2025-2026).
- Tax year 3: 2025-2026
- You complete your self-assessment tax return for 2025-2026 before the 31st January 2027 deadline and get a tax bill of £3,000.
- 31st January, 2026
- Although your tax bill is £3,000, you already paid £1,200 via payments on account (see Tax year 2 from above) so you’ll need to pay £3,300 by 31st January, 2026 which consists of:
- £1,800 balancing payment of £3,000 (full tax bill) – £1,200 (payments already made via payments on account from 2024-2025)
- £1,500 (50% of your tax bill of £3,000 for 2025-2026) as your first payment on account towards the next year (2026-2027).
- Although your tax bill is £3,000, you already paid £1,200 via payments on account (see Tax year 2 from above) so you’ll need to pay £3,300 by 31st January, 2026 which consists of:
- 31st July, 2026
- By the 31st July following the end of the tax year, you’ll need to pay your second ‘payment on account’ of £1,500 (50% of £3,000) towards the next tax year (2026-2027).