Payments on account: the January tax bill people don’t see coming.

What are payments on account?

This applies mainly to people who are self-employed, landlords, or receive income that is not taxed through PAYE. If most of your income is taxed at source, payments on account may not apply to you at all. 

For many business owners, January’s tax bill feels unexpectedly high – even when they thought they were prepared. That is because January often isn’t just about settling last year’s tax. It is also about paying towards the year ahead. These advance payments are called payments on account, and they catch people out every single year. Not because they’re hidden, but because they’re rarely explained clearly.

Here is what they are, who they apply to, and what to do if the numbers don’t reflect reality.

Payments on account are advance payments towards your next tax bill. Instead of paying all of your tax in one go after the year has ended, HMRC asks some taxpayers to pay it in installments: 

• Half in January 
• Half in July 

These payments are based on your previous year’s tax bill, not what you expect to earn this year. So in January, many people are paying:

• any remaining tax due for last year, plus 
• the first payment on account for the current tax year

That combination is usually what makes January feel expensive.

Who has to make payments on account?

You’ll usually be asked to make payments on account if: 

• you are self-employed or a sole trader 
• you receive untaxed income (such as rental income) 
• your tax bill for the previous year was over £1,000
• less than 80% of your tax was collected at source (for example, through PAYE) 

If most of your income is taxed through PAYE, payments on account often do not apply.

Why January bills feel like a shock The issue isn’t that you are paying more tax overall it is that you are paying earlier. Payments on account assume that: 

• this year will be broadly similar to last year 
• your income will stay steady 

For many small businesses, that simply isn’t how real life works. Income fluctuates. Projects end. Markets shift. Costs rise. But the payment on account system doesn’t adjust automatically – it looks backwards, not forwards. 

Can payments on account be reduced?

Yes – legitimately, when it makes sense to do so. If you expect your income (and therefore your tax bill) to be lower this year, you can apply to reduce your payments on account. 

This might be appropriate if: 

• your income has dropped 
• you’ve stopped or paused self-employment 
• you’ve returned to PAYE work 
• a one-off high year has skewed the figures 

It’s important to be realistic. Reducing payments too far can result in interest if the tax turns out to be higher than expected. This is an area where advice is genuinely useful. 

What to plan for next

If payments on account apply to you, it helps to know early: 

• another payment is due in July 
• the amount may change once your next return is submitted 

Putting money aside gradually, rather than reacting in January and July, usually makes things far less stressful. A simple cash-flow view that includes tax – not just profit – can make a huge difference. 

If you’re unsure, ask.

Payments on account aren’t a sign that you’ve done something wrong. They‘re simply part of how HMRC collects tax from people with untaxed income. If you’re unsure: why you’re paying them – whether the amount is right or whether a reduction might apply – it’s worth checking sooner rather than later. A short conversation now is often all it takes to avoid unnecessary pressure later in the year. 

If you’d like help understanding your position, get in touch.