Understanding Payments on Account Ahead of the 31 January Deadline
With three weeks left until the 31 January Self-Assessment deadline, one of the questions we hear most often at this time of year is some version of "why is my tax bill so much bigger than the tax I actually owe for last year?" The answer, more often than not, is payments on account - a feature of the Self-Assessment system that catches out a genuine number of taxpayers every single year, particularly those filing for the first time.
The Basic Mechanics
If your Self-Assessment tax bill exceeds £1,000, and less than 80% of your tax is already collected at source through something like PAYE, HMRC generally requires you to make payments on account towards the following year's tax bill, in addition to settling what you owe for the year just finished. Each payment on account is set at 50% of your previous year's total tax liability, split into two instalments - one due alongside your balancing payment on 31 January, and a second, standalone payment due the following 31 July.
Why the January Bill Can Look So Much Bigger
This is where the confusion usually sets in. Your 31 January payment typically includes three separate elements: any balance still owed for the tax year that's just ended, plus the first payment on account towards the year now underway, calculated at 50% of what you owed the previous year. For someone experiencing this for the first time, or whose income has grown significantly, the total figure due in January can look considerably larger than the tax bill they were expecting, simply because it's effectively covering one and a half years of tax liability in a single payment.
A Worked Example
Say your tax bill for the year just ended comes to £6,000. If you've never made payments on account before, your January payment would typically be £6,000 for the year just finished, plus £3,000 as the first payment on account towards the following year - a total of £9,000, followed by a second £3,000 payment on account the following July. Then, once your actual figures for that following year are known, any difference between what you've paid on account and what you genuinely owe is settled, either as a further balancing payment or a refund. Understanding this pattern in advance removes a lot of the shock when the first bill including payments on account arrives.
If Your Income Has Changed
If your income for the current year is genuinely going to be lower than the previous year, you don't have to accept payments on account calculated on the old, higher figure. You can apply to reduce them, based on a reasonable estimate of your actual liability for the year in question. This needs to be a genuine, considered estimate rather than a guess made purely to reduce the immediate payment, since HMRC charges interest on any shortfall if your income turns out higher than the reduced estimate assumed.
Planning Ahead Rather Than Being Caught Out
The businesses and individuals who handle payments on account most comfortably are the ones who understand the mechanism well before the bill arrives, and who set money aside throughout the year in anticipation, rather than discovering the full amount due for the first time in late January. If this is the first year you've encountered payments on account, or the figure has caught you off guard, it's worth having a proper conversation now about what to expect and how to plan for it, both for this payment and the one due again in July.
If your January tax bill looks larger than expected because of payments on account, we can talk you through exactly why, and whether a reduction might genuinely apply to your circumstances. Find out more about Longleys tax services.
Budgeting for the Full Picture Going Forward
Once you understand that payments on account are simply how the system spreads your tax liability across the year, rather than an unexpected extra charge, it becomes much easier to plan around. Setting aside a consistent proportion of income throughout the year, factoring in both the January and July payments rather than treating January as the only date that matters, removes much of the stress this system otherwise causes for people encountering it without proper explanation.
Getting the Detail Right for Your Situation
Because the right approach depends heavily on your specific income pattern and how it's likely to change, it's worth getting a proper, personalised view of your position rather than relying on a general rule of thumb. If you'd like help understanding exactly what you owe this January, and what's likely to be due in July, we're happy to talk it through before the deadline arrives.