Payments on account: why HMRC wants money in July, and how to pay less

Every July, a wave of self-employed people discover an HMRC payment deadline they'd forgotten about, or never knew existed. If you file a Self Assessment return and your last bill was over £1,000, the 31 July payment on account probably applies to you.

How payments on account work

HMRC doesn't like waiting a year for tax on untaxed income, so it collects in advance:

• 31 January: your balancing payment for last year, plus the first payment on account for the current year (half of last year's bill)
• 31 July: the second payment on account (the other half)

Each payment on account is simply half of your previous year's income tax and Class 4 NI liability. If your income holds steady, by the time next January arrives you've already paid most of the bill.

The nasty first year

The system stings hardest the first time you cross into it. Your January payment suddenly includes one and a half years' worth of tax: last year's bill plus half of next year's, on the same day. If your first significant self-employment year ended recently, plan for this now rather than in January.

When you can reduce them

Payments on account assume this year will look like last year. If it won't (income down, big one-off gain last year, ceased trading, gone employed), you can apply to reduce them.

Worth doing when it's genuine; dangerous when it's optimistic. Reduce them below what the final bill turns out to be and HMRC charges interest on the shortfall, backdated to the original due dates. We only reduce clients' payments when the current-year evidence supports it.

Three practical tips

1. File your return early. File soon after 5 April and your July payment can be based on the actual new-year figure rather than an estimate: sometimes it shrinks, occasionally it disappears.
2. Put a third aside. Rough rule for the newly self-employed: bank a third of drawings for tax and the timing never hurts.
3. Diarise both dates. 31 January and 31 July. Or be our client, in which case we diarise them for you, with the exact amounts.

This article is general information, not advice for your specific circumstances. For advice you can act on, book a free consultation or call us on 0151 944 4342.