Do You Pay Payments on Account Every Year? Explained

Charlotte Baroukh

Tax Expert @ Pie

3 min read

What you need to know...

Payments on account are advance tax payments made twice yearly. They're designed to cover your upcoming tax bill and help spread the cost. These payments are based on your previous year's income tax and National Insurance contributions.

The system splits your expected tax into two equal instalments. These are due on 31st January and 31st July each year. Essentially, it's a deposit system that prevents large one-off tax bills.

These advance payments are separate from your final balancing payment. The balancing payment settles any remaining amount owed after accounting for your payments on account. HMRC automatically calculates everything using your last Self Assessment return under payments on account HMRC rules.

When do you need to make these payments?

You'll need to make payments on account if your previous year's tax bill exceeded £1,000. This applies after deducting any PAYE and tax credits. Most employed individuals won't reach this threshold as their tax is deducted at source, unlike many first time self employed taxpayers.

Self-employed individuals with significant untaxed income typically face these payments. Similarly, those receiving substantial rental income or investment returns often meet the criteria. Multiple income sources that aren't fully taxed at source can also trigger the requirement.

HMRC will notify you if payments on account are required. The notification appears on your Self Assessment calculation, clearly showing the amounts due. You won't need to guess whether you're liable for these payments.

When do you need to make these payments?

How much will you actually pay?

Each payment on account equals half of your previous year's tax bill. However, only income tax and Class 4 National Insurance count towards this calculation. Capital gains tax and student loan repayments are specifically excluded.

Your payment amount appears clearly on your Self Assessment statement. Both instalments are identical unless you request adjustments. For example, if you owed £3,000 last year, you'd pay £1,500 in January and £1,500 in July.

The calculation is straightforward but can catch people off guard. I remember my first year of self-employment when I hadn't budgeted for these advance payments. Learning to set aside funds monthly made the process much more manageable.

Can you reduce or avoid these payments?

You can submit a claim to reduce payments on account if you expect lower income. This requires providing evidence supporting your reduced income projection. Complete the relevant section in your Self Assessment return or contact HMRC directly.

Be cautious when reducing payments as penalties apply if your estimate proves too low. Interest charges accumulate on any underpayment, potentially creating a larger bill later. Conversely, you can voluntarily increase payments to avoid substantial final bills.

Consider seeking professional advice before making significant adjustments. A qualified accountant can help assess whether reduction claims are appropriate. They'll also ensure you maintain adequate records to support your decision.

What happens if you miss the deadlines?

Interest charges apply immediately from the day after each due date. Unlike final tax payments, there are no automatic penalties for late payments on account. However, the interest compounds daily until you settle the outstanding amount.

You can arrange to pay in instalments if you're struggling financially. Interest continues accruing during any payment plan, but it helps manage cash flow. Contact HMRC quickly to discuss options before the situation worsens.

Setting up a Time to Pay arrangement provides breathing space. HMRC is generally accommodating if you communicate proactively about payment difficulties. They'd rather work with you than pursue enforcement action.

Will your payment pattern change over time?

Each year's payments reflect the previous year's tax liability automatically. Your payment amounts fluctuate naturally with income changes. Career developments, such as promotions or job changes, significantly impact future requirements.

Retirement often eliminates the need for payments on account entirely. Similarly, moving from self-employment to traditional employment typically reduces or removes these obligations. The system adjusts to your changing circumstances over time.

Regular reviews help predict your ongoing payment obligations accurately. Understanding how life changes affect your tax position enables better financial planning. Keep detailed records to track patterns and anticipate future requirements.

Understanding payments on account helps you plan your finances more effectively. Most people with steady employment won't face these twice-yearly payments. However, self-employed individuals and property investors typically encounter them regularly throughout their careers.

Keep accurate records and seek professional guidance when circumstances change significantly. This ensures you meet your obligations without overpaying unnecessarily. Managing your tax doesn't have to be stressful with proper planning and support.

Will your payment pattern change over time?

Final Summary

Pie is the UK's first personal tax app designed for working individuals. Unlike traditional solutions, Pie offers integrated bookkeeping and real-time tax figures. Plus, you'll receive simplified tax return processing and timely expert advice when needed.

Ready to take control of your tax payments? Visit Pie tax to see how easy managing your self-assessment can be. Join thousands who've already simplified their tax affairs with our innovative approach.