Payments on account, explained (UK Self Assessment)

Few things unsettle a new freelancer quite like their first proper January tax bill. You've dutifully set money aside, you know roughly what you owe — and then the figure HMRC asks for is markedly bigger than that. The usual culprit isn't a mistake; it's a part of the system called payments on account, and once you understand it, it stops being a shock and becomes just another date in the diary.

This guide explains what payments on account are, when they apply, why the first one feels like extra, and what to do if your income is about to drop.

A quick note first: TrustSolo isn't an accountancy, and nothing here is tax advice. It's a plain-English explainer. For your own situation, an accountant is the right port of call.

What payments on account are

A payment on account is an advance payment towards next year's tax bill. Rather than wait until your next Self Assessment to collect what you'll owe, HMRC asks you to pay some of it up front, in two instalments, based on the assumption that you'll earn roughly what you earned last year.

That's the whole idea: you pay this year's tax as normal, and at the same time you start pre-paying next year's. It isn't a second tax or a penalty — it's the same tax, collected earlier.

When they apply to you

You have to make payments on account unless one of two things is true:

• the tax you owed last year was less than £1,000, or
• you paid more than 80% of the tax you owed outside of Self Assessment — for example, through PAYE on an employed job alongside your freelancing.

For a typical full-time freelancer, neither exception applies, so payments on account are simply part of the deal once your bill clears £1,000. If you're just over the line in your first year, this is the year it begins.

The two dates — and why the first year stings

Payments on account are due in two equal instalments: by 31 January and by 31 July, each one half of the tax you owed last year.

The reason the first year catches people out is timing. That first 31 January, two things fall due at once: the actual tax for the year just gone (your balancing payment), and the first payment on account towards the year ahead. So instead of paying one year's tax, you're effectively paying one and a half. After that first jump it settles down — but nobody warns you, and a bill 50% bigger than the tax you calculated is a nasty surprise if you weren't expecting it.

One thing to fold in if it applies to you: a student loan repayment is collected through the same return, worked out by HMRC from your Self Assessment, so it forms part of that January total too. It doesn't itself create payments on account, but it does make the bill you're budgeting for larger than the tax figure alone.

A worked example

Say your first full year of freelancing leaves you with a tax bill of £6,000, due on 31 January.

• That 31 January, you pay the £6,000 you owe plus a first payment on account of £3,000 (half of £6,000) towards next year — £9,000 in total.
• By 31 July, you pay the second payment on account of £3,000.
• You've now paid £6,000 in actual tax and £6,000 in advance for next year.

The following year, if you owe roughly the same £6,000, you've already pre-paid it — so your balancing payment is nothing, and you simply make two £3,000 payments on account again (31 January and 31 July). From year two onward it's steady: two equal instalments a year, no lump-sum surprise. It's only that first January, carrying one-and-a-half years of tax at once, that stings.

If you'll earn less next year: reducing your payments on account

Payments on account assume next year looks like last year. If you know it won't — you're scaling back, taking time out, or a big client has ended — you can ask HMRC to reduce your payments on account to reflect what you actually expect to earn.

One word of caution, though: don't reduce them too optimistically. If you cut your payments on account and your real bill turns out higher than you claimed, HMRC charges interest on the difference. Reduce them if you have a genuine, well-founded reason to expect less income — but estimate honestly rather than hopefully.

Where TrustSolo helps

The pain of payments on account is almost entirely about not seeing them coming. TrustSolo keeps a running estimate of your Income Tax and Class 4 National Insurance as you invoice, so you can watch your liability building through the year and set money aside for it — the payment on account included. It's a guide to help you plan, not your tax return, and it doesn't file anything to HMRC for you; but knowing the shape of that January bill well in advance is most of the battle. You can see the estimate under tax.

None of this is difficult once you know it's there. Set aside for tax as you invoice, expect that first January to be larger, and payments on account become a rhythm rather than a shock. When you'd like the estimate kept for you as you work, you can start free — no card required.