Top 10 FAQS: 4. What’s all this about HMRC ‘Payments On Account’?

Top 10 Finance Questions Encountered By Every Entrepreneur: #4: What’s all this about HMRC ‘Payments On Account’?

Filing your first self-assessment tax return is a rite of passage as a newly self-employed person. Many wisely start a savings pot early on, setting aside money so the tax bill doesn’t sting too badly come January 31st.

But did you know, you may actually end up having to pay 1.5 years worth of tax by 31 Jan, which could mean your tax bill  is 50% higher than expected! This is  due to what’s know as ‘Payments On Account’ which can come as an unpleasant surprise first time around.

So when you first become self-employed, it’s wise to be aware of how payments on account will impact your tax obligations – and your bank balance! Being prepared for this extra payment avoids a nasty shock. In this article I’ll explain exactly how payments on account work so you can plan accordingly.

How do Payments on Account actually work?

Payments on account are advance payments towards your next year’s tax bill with HMRC. They’re estimated based on the tax you paid in the previous year. And the requirement kicks in once your tax bill is over £1,000.

Here’s a simple analogy to help make sense of it:

Imagine you have a coffee tab where you pay at the end of the year for all the coffee you’ve had through the year. HMRC’s payments on account system is like the coffee shop asking you to pay half of next year’s coffee bill  (estimate) in two chunks during the year, based on how much coffee you drank last year. They’re trying to help you avoid a large bill at the end of the year by spreading the cost over the year (but it doesn’t actually feel that helpful always!).

You make two payments on account each year: one by January 31 and the second by July 31. If you still have more tax to pay after those payments (maybe because you drank even more coffee this year), you’ll settle the difference by the next January 31st. If you overpaid (perhaps you cut back on your coffee consumption), you’ll get a refund or it’ll go towards your next bill.

And a full example:

Let’s look at a practical example, in case I’ve confused you further with the coffee analogy: Suppose you started self employment in April 2022 and your tax bill for the 2022/23 tax year was £2,000. By 31 January 2024 you’d need to pay that £2000 tax bill, plus £1,000 Payment on Account (half of the £2,000 due for 2022/23) towards the tax due for 2023/24. So it would actually be £3,000 due by 31 January 2024. This might feel like a bit of a shock if you had only put away the £2,000. 

On top of that, there is also a second payment on account due by 31 July 2024 – at least you have a bit more notice of that one. That way, all things being equal, you’d have ended up paying the right amount of tax already in advance of the due date for the 2023/24 tax year – of course things are rarely if ever that equal, predictable and simple in real life! So you might well find there is actually a bit more to pay, or you could even be in a refund position when it gets to it. In any case, as a newly self employed person,  budgeting for these Payments of Account is going to make navigate the first tax payment more smooth.


How can I best prepare for my first Payment On Account?

Prepare your tax return promptly

One of the smartest moves you can make is to tackle your tax return as soon as possible. This will give you a clear picture of what you owe and how much you’ll need to set aside for your next payment on account, and hopefully give you time to come up with a plan for how you will afford any surprising elements.

Help! I can’t afford it

If you’re facing a bill that’s larger than your wallet, HMRC may offer a lifeline in the form of a ‘Time to Pay’ arrangement. This allows you to spread the cost over a period that suits your financial situation better, providing much-needed breathing space. It’s best to be proactive and negotiate a mutually agreeable solution rather than ignore the letters.

Reducing your Payments On Account

If you know your trade in the next tax year has dipped, you may be able to reduce your Payments On Account to better reflect your current profits. This is something you would usually do during the tax return filing process if it applies.

Takeaway on Payments On Account

Understanding and preparing for payments on account can transform them from a source of stress into a manageable aspect of your business finances. With early preparation and a clear understanding of the system, you can approach this tax obligation with confidence.

If the thought of payments on account still sends a shiver down your spine, reach out. Let’s discuss your situation and bring some warmth and ease to your financial planning. Remember, you’re not alone on this journey – help is just a conversation away.


Hi, I’m Harriet Formby, your trusted Fractional CFO, Chartered Accountant and Business Growth Specialist.

I am the founder of Below The Line Finance and my mission is to financially empowering creative entrepreneurs to build aligned businesses  – with profit, purpose and healthy cashflows!  With my collaborative and supportive approach, I am dedicated to guiding you to greater confidence and success with your business finances. What could you accomplish with your very own Mini CFO?

Let’s stay in touch:

Together we can say goodbye to fear and confusion, build solid finance foundations and step into a supportive environment where you can turn your dreams into a reality through bespoke finance strategy.

Harriet Formby MA ACA

Small Business CFO, Below The Line Finance