A payment on account is the reason many people’s first self-employed tax bill is much larger than expected — not because they owe more tax than they thought, but because HMRC asks for next year’s tax in advance at the same time.
If you’ve had a letter demanding a payment you weren’t expecting, or you’re newly self-employed and trying to understand what’s coming in January, here’s exactly how it works.
What payment on account actually means
The payment on account meaning is straightforward once you see the mechanism: it’s an advance instalment toward your next tax bill, paid alongside the bill you already owed. HMRC calculates it by assuming your income next year will be roughly similar to this year, then asks for half of this year’s liability now and the other half six months later — rather than waiting a full year to collect tax on income that’s already been earned.
This is why your first payment-on-account year can feel like being charged 150% of a normal tax bill: you’re paying what you owed for the year just finished, plus 50% of an estimate for the year ahead, both on the same January deadline.
Who actually has to pay it
Is payment on account compulsory for everyone in Self Assessment? No — it isn’t universal. Payment on account isn’t universal. You’re exempt if either of two conditions applies: your most recent Self Assessment bill was under £1,000, or at least 80% of your tax for the year was already collected at source — typically through PAYE.
That second condition catches more people than it might seem. Someone with a full-time PAYE job and a small amount of self-employed or rental income on the side often clears the 80% threshold easily, because the bulk of their tax is already being deducted before Self Assessment even comes into it. It’s travel business owners running their main income through self-employment, with little or nothing taxed at source, who are squarely in scope — payment on account is the norm for that situation, not the exception.
When the deadlines actually fall
There are two payment dates each year: 31 January and 31 July. The 31 January date does double duty — it’s both the deadline for your Self Assessment return and any balancing payment for the year just finished, and the deadline for your first payment on account toward the year ahead. The 31 July date is your second instalment for that same upcoming year.
How the amount is calculated
Each instalment is 50% of your previous year’s total Self Assessment liability — income tax plus Class 4 National Insurance where it applies. Student loan repayments, voluntary Class 2 National Insurance, and Capital Gains Tax are excluded from the calculation entirely; those are always collected separately.
A worked example
Say your tax bill for one year comes to £2,000. Because that’s above the £1,000 threshold, payment on account is triggered for the following year. Your January bill becomes £3,000: the £2,000 you owe for the year just finished, plus £1,000 — half of that £2,000 — as your first payment on account for the year ahead. Your second instalment of £1,000 follows in July.
By the time you file your return for that second year, you’ve already paid £2,000 toward it through your two instalments. If your actual bill for that year comes to £1,800, you’re due a £200 refund. If it comes to £2,400, you owe a £400 balancing payment. Either way, your next payment-on-account instalments are then recalculated at 50% of whatever that new actual bill turns out to be.
If your income has genuinely dropped
If you expect the coming year’s income to be meaningfully lower than the year you’re being assessed against, you don’t have to simply accept HMRC’s estimate. You can apply to reduce your payments on account, via your HMRC online account or form SA303, rather than overpaying and waiting for a refund later. The risk runs the other way too — if you reduce the payments too far and your actual liability turns out higher, HMRC will charge interest on the shortfall back to the original due dates, so this is worth doing on a genuine, reasoned estimate rather than a hopeful guess.
What happens if you’re late
HMRC charges interest from the day after a missed deadline, calculated at the Bank of England base rate plus a fixed margin — HMRC publishes the current rate since it moves with the base rate rather than staying fixed. On top of interest, a late payment penalty structure applies in stages: a percentage penalty if payment remains outstanding 30 days after the deadline, a further penalty at 6 months, and another at 12 months if the amount is still unpaid. If you can’t pay by the deadline, contacting HMRC to arrange a Time to Pay agreement before the deadline passes is the better route than simply missing it and hoping to sort it out afterward.
Why this matters more for seasonal income
If your travel business income follows a strong seasonal pattern — busy summer months, quieter winter — payment on account can land at an awkward point in your cash cycle if you haven’t planned for it specifically. The instalment due in July, in particular, arrives mid-season for many travel businesses, when cash is more likely tied up in supplier payments and client deposits than sitting available for a tax bill. Building payment-on-account dates into the same seasonal cash flow planning discussed in our piece on cash flow problems in travel businesses avoids the instalment becoming an unwelcome surprise on top of an already tight month. Payment on account is one part of a wider picture for travel agents and tour operators, that picture often also includes VAT rules for travel agents and how TOMS interacts with overall tax planning.
How LAS Accounting can help
Getting payment on account right is mostly about not being caught off guard by it — knowing it’s coming, understanding how it’s calculated, and setting money aside in good time rather than discovering the bill in January. This is exactly the kind of thing we handle as part of Self Assessment support for travel business owners. If you’re not sure whether you’re in scope, or whether your payments on account should be adjusted for a change in income, that’s worth checking properly. Get in touch.
