Can I reduce my Self Assessment payments on account if my income has fallen?

Full answer

Payments on account are advance payments towards your NEXT year's Self Assessment tax bill, each normally set at half of your previous year's total tax liability, and reducing them is a legitimate option when your circumstances have genuinely changed for the worse. **Why payments on account can become mismatched to reality** Because each payment on account is based on the PREVIOUS year's tax bill, if your income drops significantly (for example, due to reduced self-employed profits, fewer contracts, or a career change), the payments on account calculated from your higher previous-year bill can significantly overstate what you will actually owe for the current year. **How to apply for a reduction** You can reduce your payments on account either online through your Personal Tax Account/Self Assessment account, or by submitting a paper form SA303, specifying your revised estimate of the current year's tax liability and the reduced payment amount you believe is appropriate. **The risk of reducing too far** If you reduce your payments on account and your actual tax liability for the year turns out to be HIGHER than your reduced estimate, HMRC will charge interest on the shortfall between what you should have paid (based on the eventual, correct figure) and what you actually paid, calculated from the original payment on account due dates -- this makes it risky to reduce payments too aggressively based on an overly optimistic guess. **Worked example** Someone's previous year's tax bill was £8,000, generating two payments on account of £4,000 each. Their self-employed income has genuinely fallen by roughly half this year, so they reasonably estimate their tax bill at around £4,500, and apply to reduce each payment on account to £2,250. If their actual liability later comes in at exactly £4,500, this reduction was accurate and no interest arises; if it later turns out to be £6,000, interest would be charged on the £1,500 shortfall in what they had underpaid. **Reducing to nil** It is possible to reduce a payment on account to nil if you genuinely expect no tax liability (or a liability already covered by tax deducted at source) for the year, though this should only be done with a realistic, well-evidenced basis for that expectation. **Practical tip** Only reduce payments on account based on a realistic, carefully considered estimate of your actual likely tax bill for the current year (ideally with reference to your actual year-to-date income and expenses), rather than an optimistic guess, since underestimating triggers interest charges on the resulting shortfall.

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