Every summer, thousands of self-employed people get an unwelcome surprise: a tax payment due by 31 July, months away from the January deadline everyone knows about. Here is what it is, why you owe it, and what to do if it looks too high.

What is a payment on account?

Payments on account are advance payments towards your next Self Assessment bill. If your last bill was over £1,000, and less than 80 per cent of your tax was collected at source, HMRC asks you to pay next year’s tax in two instalments in advance:

  • 31 January, alongside the balance for the year just gone.
  • 31 July, the second instalment.

Each instalment is half of your previous year’s income tax and Class 4 National Insurance bill. HMRC assumes you will earn about the same again, so it collects next year’s tax as you go.

Why it catches people out

The system stings hardest in your second year of trading. Your first January bill includes the whole of year one plus half of year two in advance, so you can face one and a half years of tax at once. The July payment then arrives while nobody is thinking about tax at all.

There is no separate penalty for paying a payment on account late, but HMRC charges interest daily from 1 August until you pay, and the rate is not kind. It is worth paying on time.

Can you reduce it?

Yes, if you have a genuine reason. Payments on account are based on last year’s profits, so if this year is going worse, you can ask HMRC to reduce them. You can do this online through your tax account or through your accountant.

Be careful, though. If you reduce your payments and your profits turn out higher than you claimed, HMRC charges interest on the shortfall, backdated to the original due dates. Reduce them because the numbers support it, not because July is an awkward month for cash.

This is exactly where up to date bookkeeping earns its keep. If your records are current, your accountant can see how the year is actually going and reduce your payments with confidence, or warn you to set more aside.

Never be surprised again

Our clients know what they owe and when, months in advance, because we prepare returns early and explain every payment on account in plain English. If a July payment has just caught you off guard, that is a sign your accountant is telling you things too late.

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