With the January tax return and payment deadline looming, there have been lots of clients asking about how payments on account for tax work. Here’s the workings behind it explained for you:
One of the biggest shocks for people new to Self Assessment is discovering that their first January tax bill isn’t just last year’s tax — it also includes a large advance payment towards next year. This often makes the first year feel like a “150% tax bill” in one go.
What Payments on Account Are
Payments on Account (POAs) are two advance instalments towards your following year’s tax bill, based on the assumption that your profits will remain similar to the year before. Each instalment is 50% of your previous year’s bill.
Why the First Year Can Feel Like a 150% Tax Bill
In your first year, HMRC requires you to pay:
- 100% of the tax you owe for the tax year just ended (your balancing payment), plus
- 50% of that amount again as your first Payment on Account for next year.
This creates the “150% tax bill” effect.
Example
If your tax bill is £6,000, your January payment becomes:
- £6,000 balancing payment
- £3,000 first POA
Total due in January = £9,000.
Then another £3,000 is due in July.
Once you are “in” the system and these 6 monthly payments become normal, unless there is a significant change in your overall income, these will remain consistent.
Why HMRC Does This
- To spread future tax payments
- To ensure steady tax collection throughout the year in the same way as PAYE would be
- To reduce the risk of taxpayers falling behind
When the Shock Passes
From the second year onward, POAs become easier because you’ve already made two instalments during the year. Your January payment typically includes only the next 50% instalment plus any balancing adjustment.
Summary
- First year: pay 100% of last year + 50% towards next year
- Effectively a 150% January bill
Payments on Account are only payable when BOTH of the following conditions are met:
- Your last Self Assessment tax bill was more than £1,000.
- Less than 80% of your tax was collected at source (e.g., through PAYE).
They usually apply to:
- Self‑employed individuals
- Landlords
- Partners in partnerships
- Individuals receiving untaxed income such as dividends or investments
- Company directors with non‑PAYE income
Payments on Account are NOT payable when:
- Your tax bill is under £1,000
- More than 80% of tax was already deducted via PAYE
- It is your first year of Self Assessment
- The tax relates only to Capital Gains Tax or student loans (these are excluded from POA calculations)
Reducing payments on account
If you know that your income is reducing significantly then you can apply to reduce the payments on account. Be very cautious though as if you reduce them be too much, HMRC can charge interest on any shortfall.
If you’re unsure how your personal circumstances will be affected by the payments o account system then contact Nicholsons and one of our team can help.