If you've recently filed your first Self Assessment and received a bill larger than expected, there's a good chance HMRC has added a payment on account. For many people, this comes as a complete surprise.
What is payment on account?
Payment on account is HMRC's system for collecting tax in advance. Instead of paying all your tax in January, HMRC asks you to pay your estimated tax for the next year in two instalments — January and July — based on the previous year's bill.
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How is it calculated?
Each payment is 50% of your previous year's tax bill. So if your 2023/24 tax bill was £4,000, HMRC will ask for two payments of £2,000.
When does it apply?
Payments on account apply if your Self Assessment tax bill is over £1,000 and less than 80% of your tax was collected at source through PAYE.
How can you reduce them?
If your income will be lower in the coming year, you can apply to reduce your payments via HMRC online or a SA303 form. Be careful — if you reduce too much and your actual tax is higher, HMRC will charge interest.
How Fernside Accounting can help
We review your payments on account as part of every Self Assessment filing. Book a free 20-min call to make sure you're not overpaying.