What are self-employed payments on account and when are they due?

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Payments on account often catch newly self-employed people out, because the first year they apply can mean paying one and a half years of tax in a single 31 January deadline. **When payments on account apply** HMRC requires payments on account if your Self Assessment bill for the previous tax year was more than £1,000, AND less than 80% of your total tax liability for that year was already collected at source (for example, through PAYE on employment income or a pension) -- most self-employed people with profits above a modest level fall into this category, since none of their self-employment tax is deducted at source. **How much each payment on account is** Each payment on account is exactly half of your PREVIOUS year total Self Assessment tax and Class 4 National Insurance bill (excluding one-off items like Capital Gains Tax, which are never included in payments on account) -- so if your bill for the previous tax year was £6,000, each payment on account for the current year is £3,000. **The two deadlines** The first payment on account is due on 31 January (the same day as the balancing payment for the previous tax year, which is why the first year can involve three payments at once -- see below), and the second payment on account is due on 31 July, roughly six months later. **Worked example -- the painful first year** A newly self-employed person's first Self Assessment tax return (for their first trading year) shows a bill of £6,000. On 31 January following the end of that tax year, they must pay: the £6,000 balancing payment for the year just finished, PLUS a first payment on account of £3,000 (half of £6,000) towards the CURRENT tax year -- a total of £9,000 due on a single date. Then on 31 July, they pay a second payment on account of a further £3,000, bringing their total advance payments for the current year to £6,000, matching the prior year's bill (an assumption that this year's liability will be similar). **The following January -- the balancing payment** Once the current tax year's actual profit is known and the return is filed, if the actual tax bill for that year turns out to be higher than the £6,000 already paid on account, a balancing payment covers the shortfall on the following 31 January, alongside the next year's first payment on account -- if the actual bill is LOWER (for example, because profits fell), the excess already paid on account is credited or refunded. **Reducing payments on account if income falls** If you know your income will be significantly lower in the current year (for example, your self-employment profits have dropped), you can apply to HMRC to reduce your payments on account rather than paying based on the prior (higher) year's figures -- however, if you reduce them too far and your actual liability turns out higher than expected, HMRC can charge interest on the shortfall, so this should be based on a genuine, reasonably confident estimate, not guesswork. **Practical tip** Set aside roughly a third of your self-employment profit throughout the year specifically for tax, and budget carefully for the first year payments on account apply, since the combined balancing payment plus first payment on account in that single January can be a much larger amount than many newly self-employed people expect based on their actual tax liability for the year just ended alone.

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