Payments on account are one of the most common Self Assessment surprises. Many sole traders expect to pay last year’s tax bill, then discover HMRC also wants money towards the next one.
What payments on account are
Payments on account are advance payments towards your next Self Assessment bill. HMRC uses your previous tax bill as a guide.
- Usually paid in January and July
- Based on the previous year’s tax liability
- Can apply even if cash flow is tight
Why they surprise sole traders
The first year can feel expensive because you may pay the balancing payment for one year plus the first payment on account for the next year.
- Plan before January
- Do not spend tax savings as working capital
- Review profit during the year
When payments can be reduced
If your income has fallen, you may be able to reduce payments on account. But reducing them too far can lead to interest if you underpay.
- Use realistic profit estimates
- Keep bookkeeping up to date
- Ask for advice before reducing payments
How bookkeeping helps
Accurate monthly records help estimate the tax bill earlier. That gives you time to save, adjust prices or manage cash flow.
- Track profit, not just sales
- Set aside a percentage of income
- Review expenses before year end
Practical planning tips
Treat tax as a cost of doing business. A separate account and regular transfers can make payments on account less painful.
- Save monthly
- Review your forecast each quarter
- Prepare your tax return early
Key takeaway
Payments on account are manageable when you know they are coming and your bookkeeping gives you a realistic profit figure.
