Payments on account: What they mean for your small business and how to manage them

Published Wednesday 26 November 2025

Table of contents

• What are tax payments on account?
• Who needs to make payments on account?
• How are payments on account calculated?
• When to make tax payments on account
• What to do if you can't afford your payments on account
• Payment on account example
• How can you reduce your payments on account?
• How does a payment on account refund work?
• Managing payments on account for your business
• FAQs on payments on account

Key takeaways

• Calculate your payments on account by dividing your previous year's total tax bill by two, with each payment covering 50% of last year's liability for both income tax and Class 4 National Insurance.

• Make your first payment on account by 31 January (alongside any remaining tax from the previous year) and your second payment by 31 July to avoid penalties and 8% interest charges.

• Apply to reduce your payments on account using form SA303 or your Government Gateway account if you expect to earn significantly less than the previous year, but consult an accountant first to avoid underpayment penalties.

• Set up regular weekly or monthly payments towards your tax bill throughout the year to manage cash flow effectively and avoid struggling with large lump sum payments at deadline dates.

What are tax payments on account?

Payments on account are advance payments towards your next Self Assessment tax bill. If you're self-employed and owe more than £1,000 in tax, you need to make these payments.

Here's how they work:

• Make two equal payments, each equal to half of your previous year's tax bill
• Spread your tax costs across the year to help manage cash flow
• Pay tax in advance on work you expect to do, not work already completed

Who needs to make payments on account?

You must make payments on account if your last Self Assessment tax bill was more than £1,000. However, you won't have to pay if more than 80% of the tax you owed was paid at source – for example, through your tax code if you're also an employee.

If you meet the criteria, HMRC automatically includes payments on account in your tax bill, so you don't need to set them up.

How are payments on account calculated?

Payment calculation is straightforward: each payment on account equals 50% of your previous year's tax liability.

Calculation steps:

• Take your total tax bill from last year
• Divide by 2
• Use this amount for each of your two payments on account

Example: If you paid £2,000 in tax last year, each payment on account will be £1,000.

Your payments cover both income tax and Class 4 National Insurance if you're self-employed.

When to make tax payments on account

Two payment deadlines apply for payments on account:

31 January deadline:

• Pay any remaining tax from the previous year
• Make your first payment on account for the current tax year

31 July deadline:

• Make your second payment on account for the current tax year

Make both payments by midnight on these dates to avoid penalties.

Learn how to fill in a self assessment tax return online.

What to do if you can't afford your payments on account

You must make payments on account if your tax bill exceeds £1,000.

If you need help making lump sum payments:

• Set up weekly or monthly payments towards your tax bill
• Choose an amount you can afford to pay regularly
• Make regular payments to help you meet deadlines and avoid large lump sums

If you miss a payment deadline, HMRC charges interest on underpaid tax at 8% and may also apply penalties.

Payment on account example

Here's a practical example of how payments on account work:

Year 1 (2022/23):

• You start self-employment
• File your first tax return by 31 January 2024
• Tax bill: £5,000

Payment schedule:

• 31 January 2024: Pay £5,000 (previous year's tax) + £2,500 (first payment on account)
• 31 July 2024: Pay £2,500 (second payment on account)

Total first-year payments: £10,000

Year 2 onwards:After your first year, you will have already paid towards your current year's tax, so future payments are more manageable.

How can you reduce your payments on account?

You can if you expect to earn less than the previous year.

Application methods:

• Online: Sign in to your Government Gateway account and complete the digital form
• By post: Submit form SA303 to HMRC

Important risks to consider:

• Pay interest if you underpay your tax
• Face penalties for significant underpayments, especially if you make a fraudulent or negligent claim to reduce payments
• Save for a larger year-end tax bill if you reduce your payments on account

Talk to an accountant or bookkeeper before reducing your payments to avoid unexpected costs.

How does a payment on account refund work?

Payment on account refunds happen when you've paid more tax than you actually owe. This often occurs when your income decreases from the previous year.

How refunds work:

• HMRC reviews your tax return to determine if you've overpaid
• Automatic refund: If you've provided bank details, HMRC refunds automatically
• Manual request: Use your HMRC online account to request a refund if it doesn't happen automatically

Refund timeline: According to its service dashboard, HMRC aims to process the refund within two weeks of receiving a return, but you should contact them if it takes longer than six weeks.

You can choose to receive a cheque in the post, get paid directly into your bank account, or have the amount deducted from your next payment on account if you are due to pay one soon.

Managing payments on account for your business

Xero's software can provide a real-time view of your cash flow and financial performance to help you predict the amount you'll owe for payments on account. By tracking your actual income and expenses, Xero will alert you if you're falling short of your targets.

You can integrate Xero with the tax software or platforms you use to submit your self assessment tax returns. This lets you use data directly from Xero to calculate your tax owed, including payments on account, and streamlines the process.

Find out more about managing your income tax with the Making Tax Digital for Income Tax Self Assessment content hub.

FAQs on payments on account

Find answers to common questions about payments on account below.

Why does HMRC ask for payments on account?

Payments on account help you spread the cost of your tax bill over the year. It's a similar idea to the Pay As You Earn (PAYE) system for employees, making tax payments more manageable by avoiding a single large bill at the end of the tax year.

What does the first payment on account cover?

Your first payment on account is an advance payment towards the tax bill for the current tax year. For example, the payment you make on 31 January 2025 is for the 2024/25 tax year, and it's calculated based on your tax bill from the 2023/24 tax year.

Are payments on account compulsory?

Yes, if you meet the criteria set by HMRC, making payments on account is compulsory. However, if you know your income will be lower in the current tax year, you can apply to HMRC to reduce your payments.