Payment on Account Explained:
Why HMRC Asks for Early Tax Payments
If you file Self Assessment, you may see a line called payment on account. Therefore, many people ask why HMRC wants money early. Payment on account self assessment is not extra tax. Instead, it is an advance payment towards your next tax bill. It helps spread costs across the year. It also reduces nasty surprises.
At Sepera Accounting, we explain payment on account self assessment in plain English. As a result, you can focus on your business and your clients. We handle the tax detail for you.
What is Payment on Account Self Assessment?
A payment on account is an advance payment towards your next Self Assessment bill. HMRC usually collects it in two instalments. Each instalment is normally half of last year’s tax. The due dates are 31 January and 31 July. HMRC also includes Class 4 National Insurance for many self-employed taxpayers.
In other words, payment on account self assessment uses last year as a guide. Then HMRC asks you to pay part of next year’s tax early. Later, when you file the next return, HMRC adjusts the final figure. If you paid too much, you can claim a refund. If you paid too little, you make a balancing payment.
Who has to Pay Payment on Account Self Assessment?
You must make the two payments unless one of two exceptions applies. Firstly, you do not pay if the tax you owed last year was less than £1,000. Secondly, you do not pay if you already paid more than 80% of your tax outside Self Assessment. For example, PAYE can cover most of your tax.
Therefore, payment on account self assessment often affects sole traders, partners and landlords. It also affects anyone with large untaxed income. However, many PAYE employees with small side income do not meet the rule.
If you are unsure, check your Self Assessment statement. It will show whether payment on account self assessment applies.
Why HMRC Asks for Payment on Account Self Assessment
HMRC aims to collect tax closer to when you earn the income. As a result, payment on account self assessment reduces the gap between earning and paying. It also reduces the risk of large debts building up. Meanwhile, it can smooth your cash flow once you get used to the cycle.
However, the first year can feel harsh. That is because you pay the whole bill for the year. Then you also pay the first instalment towards the next year. HMRC shows this clearly in its worked examples.
How Payment on Account Self Assessment is Calculated
HMRC normally splits last year’s relevant tax into two equal parts. Each part becomes a payment on account self assessment instalment.
A Simple Example
Assume your 2023 to 2024 bill is £3,000. You did not pay payments on account previously. HMRC would ask for £4,500 by 31 January 2025. That total includes the £3,000 bill plus a first payment on account of £1,500. Then you pay a second payment on account of £1,500 on 31 July 2025.
Now assume your next year tax is higher than £3,000. You would then owe a balancing payment by the next 31 January.
What is Included in the Balancing Payment?
The balancing payment settles the difference between your total tax due and what you already paid on account. It can also include capital gains and student loan amounts shown in your calculation. This matters for budgeting payment on account self assessment. You may think payments on account cover everything. However, the balancing payment can still be significant.
Key Dates for Payment on Account Self Assessment
Self Assessment payment dates are clear. You usually pay by 31 January and 31 July. January covers any balancing payment and your first payment on account. July covers your second payment on account. Plan payment timings as well. Some methods are same day or next day. Others take three to five working days. Do not wait until the final day if you use a slower method.
How to Pay Payment on Account Self Assessment
HMRC offers several ways to pay. You can pay through your online bank account. You can also use Faster Payments. Cards are also an option. Direct Debit is useful if you set it up early. HMRC also highlights the HMRC app as a payment route. If you want more control, you can pay weekly or monthly towards your next bill. This is called a Budget Payment Plan. Your regular payments sit as credit. As a result, you have less to pay at the deadline. At Sepera Accounting, we often set up payment on account self assessment budgeting systems for clients. Therefore, you stop worrying about January and July. You can focus on growing revenue instead.
Budgeting for Payment on Account Self Assessment
Good budgeting makes payment on account self assessment simple. The key is to treat tax as not spendable cash.
1) Create a tax reserve account
Open a separate savings account. Move a set percentage of income into it. Many businesses start with 20% to 30%. Your exact rate depends on your profit and other income. As a result, you avoid spending money that belongs to HMRC.
2) Estimate early and adjust
Do not wait for January. Instead, estimate your profit during the year. Then adjust your tax reserve. If profit rises, increase saving. If profit falls, you may reduce your payments on account.
This approach keeps payment on account self assessment predictable. It also reduces end of year stress.
3) Plan for the “double hit” in January
The January payment often combines two things. It includes any balancing payment. It also includes the first payment on account.
Therefore, aim to have more cash ready for January than for July.
4) Use HMRC’s Budget Payment Plan
HMRC lets you pay weekly or monthly by Direct Debit. You must be up to date to start the plan. You choose the amount and frequency. You can also pause payments for up to six months if needed.
A Budget Payment Plan can work well with payment on account self assessment. It turns large bills into manageable payments.
5) Protect cash flow with invoicing discipline
Late client payments create tax stress. Therefore, invoice quickly and chase politely. Also, consider payment terms and deposits. This is a business habit, not a tax rule. However, it supports your ability to pay on time.
6) Keep records clean
Accurate records reduce surprises. They also support claims for allowable expenses. As a result, your estimated tax becomes more reliable.
If you want a hands-off approach, Sepera Accounting can manage bookkeeping and forecasting. Therefore, payment on account self assessment does not distract you from your work.
What if You Cannot Afford Payment on Account Self Assessment?
- If you cannot pay on time, act early. HMRC may allow you to pay overdue tax in monthly instalments. To set up a plan, you need reference numbers, bank details and an overview of income and spending.
- If your bill is not overdue, a Budget Payment Plan may suit you better.
- If your bill is overdue, you can check eligibility online. You can then set up a Time to Pay arrangement.
At Sepera Accounting, we help you choose the right route. We also help you prepare figures HMRC expects. Consequently, payment on account self assessment becomes less overwhelming.
How to Reduce Payment on Account Self Assessment
If you know your tax will be lower than last year, you can ask HMRC to reduce payments on account. You do this online in your account or by sending form SA303.
Be careful, though. If you reduce payment on account self assessment too much, your final bill may be higher. HMRC then charges interest on the difference.
A practical approach works best. Reduce only when you have evidence. For example, your profit dropped and you can show current accounts. Sepera Accounting can model scenarios and advise on a safe figure.
Interest and Penalties You Should Avoid
HMRC charges interest when you pay late. Interest rates are linked to the Bank of England base rate. Since 6 April 2025, late payment interest is base rate plus 4%.
Rates also change over time. For example, GOV.UK shows late payment interest at 8.00% from 27 August 2025. It then changes to 7.75% from 9 January 2026.
Penalties also apply. For late filing, HMRC charges an initial £100. After three months, daily penalties can apply. Further penalties apply after six and twelve months. For late payment, HMRC charges 5% of tax unpaid at 30 days, six months and twelve months. It also charges interest.
Therefore, paying on time usually saves real money. It also saves stress. That is why payment on account self assessment needs planning.
Use HMRC Learning Tools alongside Your Own Planning
HMRC publishes webinars and recorded videos for Self Assessment. One topic is “Your Self Assessment calculation and payments”. It covers what is included in the calculation and payments on account. It also explains what to pay and when. It covers budget payment plans and how to pay. It also explains what to do if you cannot pay on time.
Embedding the HMRC video on your page supports trust. It also supports AEO. Readers can watch the official explanation. Then they can use your article for practical payment on account self assessment budgeting steps.
A Quick Business Note on Your Legal Structure
When you set up a business, you choose a legal structure. This affects how you run the business and pay tax.
For example, a sole trader structure is simple. A partnership can be more complex. A private limited company is legally separate from the people who run it. Therefore, structure can change how often payment on account self assessment applies. Sepera Accounting can advise on structure before you grow. As a result, you avoid costly changes later.
Common mistakes that trigger problems
- You forget the 31 July payment. Then interest starts quickly.
- You pay only the balancing payment in January. You ignore the first payment on account.
- You reduce payments on account without evidence. Then you pay interest later.
- You pay by a slow method too close to the deadline. HMRC warns that some methods need three to five working days.
- You do not forecast profit. Therefore, the January bill shocks you.
Payment on account self assessment becomes predictable with the right system. Firstly, understand the rule and the dates. Secondly, build a tax reserve and forecast early. Thirdly, use tools like the Budget Payment Plan when it fits.
If you want clarity and calm, Sepera Accounting can take the workload. We can review your Self Assessment, plan cash flow and liaise with HMRC when needed. As a result, payment on account self assessment stops being a distraction. You can focus on your business and do what you do best.
Key Self Assessment Deadlines
31 January – The main deadline
You file your return and pay any balancing payment. You also usually pay the first payment on account.
31 July – The second payment on account deadline
If payments on account apply to you.
Tip: Set Deadline Reminders Early
Many first-time filers miss deadlines simply because they are unaware of them. HMRC does not usually send reminders for the 5 October registration deadline. Therefore, it is wise to set calendar reminders well in advance.
Personalised Tax Advice
If you want predictable tax bills Sepera Accounting can help.
We handle Self Assessment registration filing and payments on account planning.
As a result you can focus on running your business with confidence.
Contact Details
To speak with our team:
📞 +44 20 7071 8676
📧 office@seperaaccounting.co.uk
Our accountants are ready to assist all clients who want a smooth transition into the new digital tax era.
FAQ - Payment on Account Self Assessment
What does payment on account self assessment mean?
Payment on account self assessment means you pay part of next year’s tax bill in advance. HMRC usually splits it into two payments. Each payment is normally half of last year’s tax.
When are payments on account due?
Payments on account are usually due by 31 January and 31 July. The January deadline often includes a balancing payment too.
Do I always have to pay payment on account self assessment?
No, not always. You normally do not pay if last year’s tax was under £1,000. You also do not pay if you paid over 80% outside Self Assessment.
How does HMRC calculate payment on account self assessment?
HMRC uses last year’s tax as a guide. It then charges two equal instalments. Your final bill is adjusted after you file your next return.
What is a balancing payment in Self Assessment?
A balancing payment is the extra tax due after HMRC deducts payments on account. It is usually due by 31 January after the tax year ends.
Can I reduce payment on account self assessment?
Yes, you can reduce it if you expect a lower tax bill. You can claim a reduction online or by using form SA303. However, HMRC may charge interest if you reduce too far.
Can I pay weekly or monthly instead of in a lump sum?
Yes, HMRC offers a Budget Payment Plan by Direct Debit. It lets you pay weekly or monthly towards your next bill. As a result, you have less to pay at the deadline.
What if I cannot pay my Self Assessment bill on time?
You may be able to set up a payment plan and pay in instalments. HMRC checks what you can afford. Act early and speak to HMRC or ask Sepera Accounting to guide you.
What charges apply if I pay late Self Assessment bill?
HMRC can charge penalties of 5% of the tax unpaid at 30 days then 6 months then 12 months. HMRC also charges interest on the amount owed.
Where can I learn the official HMRC rules quickly?
Start with HMRC’s guidance on payments on account and Self Assessment payments. These pages confirm the thresholds dates and options. If you want a clear plan Sepera Accounting can handle the process for you.
