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Every year, thousands of UK taxpayers receive a Self-Assessment bill from HMRC and ask the same question:
“Why am I being asked to pay tax for a year that hasn’t happened yet?”
If you’ve ever been confused by payments on account, you’re not alone. This part of the UK tax system is widely misunderstood — and often poorly explained. As a result, some people pay when they don’t need to, while others are caught out by large, unexpected bills.
This guide explains who must pay payments on account, who doesn’t, and why HMRC applies them in the first place.
What are payments on account?
Payments on account are advance payments towards your next Self-Assessment tax bill.
HMRC assumes that if you owed tax last year, you are likely to owe a similar amount in the current tax year. Rather than waiting until the following January, they ask you to pay part of that tax early.
Payments on account are usually split into:
- 31 January – first payment (50% of last year’s tax)
- 31 July – second payment (remaining 50%)
Once your next tax return is submitted, a balancing payment may be due if your actual tax bill is higher than the payments already made.
Importantly, payments on account are not an extra tax — they are simply paying future tax in advance.
The payments on account threshold
You will usually have to make payments on account if both of the following apply:
- Your Self-Assessment tax bill was more than £1,000
- Less than 80% of your total tax was collected at source (for example, through PAYE)
If either condition is not met, payments on account normally do not apply.
This threshold is one of the most common sources of confusion for UK taxpayers.
PAYE vs Self-Assessment: why it matters
Whether payments on account apply largely depends on how your income is taxed.
You’re unlikely to pay payments on account if:
- You are employed and taxed fully through PAYE
- PAYE covers at least 80% of your total tax
- Your Self-Assessment bill is under £1,000
You’re more likely to pay payments on account if:
- You are self-employed
- You are a company director taking dividends
- You have rental income
- You receive overseas income
- You have multiple income streams outside PAYE
The moment most of your tax is no longer collected automatically, HMRC switches to advance payments.
Do I have to pay payments on account?
This is one of the most searched questions we see — and the honest answer is: not everyone does.
You might be in Self-Assessment and still not need to pay payments on account. Filing a tax return alone does not automatically trigger them.
Typical examples where payments on account do not apply:
- Employees with small amounts of additional income
- Directors whose PAYE salary covers most of their tax
- Individuals with one-off income in a single tax year
HMRC’s system applies payments on account automatically, based on last year’s figures — not on whether they still make sense for your current situation.
Common misunderstandings around payments on account
We see the same misconceptions every year:
“HMRC has calculated it, so it must be correct.”
HMRC’s calculation is automatic. It does not consider reduced income, changes in circumstances or one-off profits.
“This is a penalty or extra charge.”
It isn’t. It’s simply early payment of future tax.
“Everyone in Self-Assessment pays this.”
Many UK taxpayers file Self-Assessment returns without ever paying payments on account.
“I can’t change it.”
You can apply to reduce payments on account — but only where there is a genuine reason.
Typical UK client profiles affected
Payments on account most commonly affect:
Self-employed professionals
Freelancers, contractors and consultants often experience a sharp increase in tax payments after their first profitable year.
Company directors
Especially where income is taken through dividends rather than PAYE salary.
Landlords
Rental income frequently triggers payments on account, even where profits are modest.
First-time Self-Assessment filers
The first year can be a shock: one tax bill turns into two payments — plus a balancing amount.
People with fluctuating income
When income drops but payments on account are not adjusted, cashflow pressure quickly builds.
Can payments on account be reduced?
Yes — but only where it is justified.
You may apply to reduce payments on account if you reasonably expect your tax liability to be lower. Common reasons include:
- Reduced trading income
- One-off income in the previous year
- Ceasing self-employment
- Lower dividend income
Reducing payments without proper justification can result in interest and penalties, so this should always be reviewed carefully.
Why payments on account matter for cashflow
The biggest issue is rarely the tax itself — it’s the timing.
In January, some taxpayers are asked to pay:
- the final balance for last year, and
- the first payment for the current year
That can mean paying up to 150% of the previous year’s tax in one go.
Understanding your position early allows for proper planning — rather than reacting under pressure close to the deadline.
Our approach at J. Dauman & Co.
If payments on account aren’t clear, it’s worth getting advice before the deadline.
We support UK business owners and individuals in understanding whether payments on account apply, what HMRC is asking for, and how to approach it sensibly — without paying more, or earlier, than necessary.
If you’d like help reviewing your position, contact J. Dauman & Co. to speak with our team.