Tax

What is Payment on Account?

Payments on account are advance payments towards your next year's tax bill, each worth 50% of your previous year's Self Assessment.

Current Rate (2025/26)

50% of previous year's bill, twice per year

Example

2023/24 tax bill was £10k. In 2024/25 you pay two £5k payments on account towards 2024/25 bill.

Key Dates

31 January and 31 July each year

How Payment on Account Works in Practice

Payments on account are advance payments towards your Income Tax and Class 4 National Insurance liability for the current tax year. They are based on the assumption that your tax bill will be roughly the same as the previous year. Each payment is 50% of the previous year's total Self Assessment liability (excluding tax deducted at source through PAYE and any Capital Gains Tax). Two payments are made each year, effectively pre-paying next year's tax.

You need to make payments on account if your Self Assessment tax bill was £1,000 or more and less than 80% of your total tax liability was collected at source (through PAYE or other deductions). Most company directors who take dividends will need to make payments on account because dividend tax is not deducted at source.

The payment schedule works as follows: on 31 January, you pay the balancing payment for the previous tax year (the difference between what you owe and what you already paid through payments on account) plus the first payment on account for the current tax year. On 31 July, you make the second payment on account for the current tax year. This means January is often a 'double payment' month, which catches many people off guard.

For example, for the 2025/26 tax year: on 31 January 2027 you pay the balancing payment for 2025/26 plus the first payment on account for 2026/27. On 31 July 2027, you pay the second payment on account for 2026/27. This cycle repeats each year, and the first year of payments on account is the most painful because there are no prior advance payments to offset against your bill.

Step by Step

HMRC calculates your payments on account automatically when you submit your Self Assessment return. They take the total tax and Class 4 NI due for the year, subtract any tax already collected at source (PAYE, tax on savings interest, etc.), and the remaining amount becomes the basis for next year's payments on account. Each payment on account is half of this amount.

If you know your income will be lower next year, you can apply to reduce your payments on account through your online tax account or by filing form SA303. Be careful with this -- if you reduce too much and your actual tax bill turns out to be higher, HMRC will charge interest on the underpayment from the original due date.

At the end of the tax year, when you file your actual return, HMRC calculates your real liability and offsets the payments on account already made. If you overpaid, you get a refund. If you underpaid, the difference becomes a balancing payment due on 31 January. If your tax bill has grown, the next year's payments on account also increase accordingly.

Practical Tips

Set aside 25-30% of every dividend you take into a separate savings account to cover your tax bill and payments on account
Mark both 31 January and 31 July in your calendar with payment reminders at least two weeks before
File your Self Assessment return early (as soon after 6 April as possible) to know your payments on account amounts well in advance
If your income varies significantly year to year, use HMRC's online service to adjust payments on account -- but err on the side of overpaying to avoid interest charges

Common Mistakes to Avoid

Not budgeting for the 31 January double payment (balancing payment plus first payment on account) -- this is the biggest cash flow shock for new directors
Reducing payments on account too aggressively when expecting lower income, then facing interest charges when income stays the same
Forgetting the 31 July deadline for the second payment on account -- HMRC charges interest from the due date even if the final tax bill is lower
Not realising that the first year of Self Assessment triggers payments on account, effectively requiring 150% of one year's tax in the first year

Frequently Asked Questions

When do I start making payments on account?

You start when your Self Assessment tax bill exceeds £1,000 and more than 20% of it was not collected at source. Typically this begins the second year you file a Self Assessment return with significant untaxed income.

Can I reduce my payments on account?

Yes, if you expect your income to be lower than the previous year, you can apply to reduce them through your online HMRC account. However, if your actual liability turns out higher than the reduced payments, HMRC charges interest on the shortfall from the original due dates.

What happens if I pay late?

HMRC charges interest from the due date at the current rate (currently around 7.25%). For the 31 January payment, if you are more than 30 days late, you may also face a 5% surcharge. Further surcharges apply at 6 months and 12 months late.

Do payments on account include Capital Gains Tax?

No, payments on account only cover Income Tax and Class 4 National Insurance. Capital Gains Tax is paid separately as a balancing payment when you file your return (or within 60 days for residential property gains).

I am in my first year of Self Assessment -- what do I pay?

In your first year, you pay the full tax bill for that year plus two payments on account for the next year. This effectively means paying 150% of one year's tax. It is a common cash flow shock for new directors.

Source: HMRC Self Assessment Payments on Account: https://www.gov.uk/understand-self-assessment-bill/payments-on-account and Self Assessment Manual (SAM110000): https://www.gov.uk/hmrc-internal-manuals/self-assessment-manual

Related Terms

Self Assessment

Self Assessment is the system HMRC uses to collect Income Tax from people who don't have all their tax deducted at source (via PAYE).

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