Part of our complete guide to Self Assessment.
The surprise that catches almost every first-timer
You file your first self assessment return, see a tax bill you'd budgeted for, and then discover you actually owe nearly 1.5 times that amount. This isn't an error, it's payments on account, HMRC's system for collecting next year's tax in advance, and it catches almost everyone the first time it applies.
What triggers it
Payments on account apply once your self assessment tax bill exceeds £1,000, and less than 80% of your tax was already collected at source (for example, through PAYE). Most self-employed people and landlords above this threshold fall into the system.
How the maths works
Once you're in the system, you pay in three instalments across the year rather than one:
- 31 January: your balancing payment for the year just finished, plus the first payment on account for the current year (50% of last year's bill)
- 31 July: the second payment on account (the remaining 50%)
So the January payment the first time you're caught by this is effectively 150% of a normal year's tax: the full balance owed for the year just gone, plus half of next year's estimated bill in advance. Use our payments on account forecaster to see your actual numbers ahead of time rather than being surprised by them.
Key point: This isn't a one-off cost, it's a permanent shift in timing. Once you're in the payments-on-account system, you generally stay in it every year your bill is above £1,000, the January 150% shock only happens the first time, after that the pattern becomes predictable.
If your income is about to fall
You can apply to reduce your payments on account if you genuinely expect lower income than last year. Be careful with this though, if you reduce them and your income doesn't actually fall as much as predicted, HMRC charges interest on the shortfall. Only reduce based on a real, considered forecast, not optimism.
Want to know your exact number before January? Book a free consultation and we'll forecast your payments on account and make sure there's no surprise waiting for you.
Frequently asked questions
What triggers payments on account?
Your self assessment tax bill exceeding £1,000, with less than 80% of it collected at source (e.g. through PAYE). Most self-employed people and landlords above this threshold are affected.
How much are the payments?
Each payment on account is 50% of your previous year's tax bill, so together they equal 100% of last year's liability, paid in advance toward the current year.
What if my income drops the following year?
You can apply to reduce your payments on account if you genuinely expect lower income, but reducing them too far, if your income doesn't actually fall, triggers interest on the shortfall.
Why does the first year feel so expensive?
Because you're paying last year's tax bill in full, plus 50% of the estimated current year's bill, in the same 31 January payment, effectively 150% of a normal year's tax in one go.