Payments on Account Explained: Why January Feels So Expensive

Payments on Account are one of the most misunderstood parts of the Self Assessment system and one of the biggest financial shocks for business owners in January.

Many people feel like they are paying double tax, but that is not actually what is happening. The issue is timing, and if you are not prepared for it, it can put serious pressure on your cash flow.

Here is a simple explanation of what Payments on Account are, who they apply to, and how to plan for them properly.

What Are Payments on Account?

Payments on Account are advance payments toward your next tax bill.

Instead of paying all of your tax after the year has finished, HMRC ask you to pay some of it early based on what you owed last year.

They assume that if you earned a similar amount last year, you are likely to earn a similar amount this year.

Who Has to Pay Payments on Account?

Payments on Account usually apply if:

• Your Self Assessment tax bill was over £1,000, and

• You did not pay most of your tax through PAYE

This commonly affects sole traders, partners, and company directors who take dividends or other untaxed income.

If this sounds like you, there is a good chance Payments on Account apply.

How Much Do You Pay and When?

In most cases, HMRC ask for:

• 50 percent of your previous year’s tax bill by 31 January

• 50 percent by 31 July

On top of that, you still need to pay any remaining tax owed for the previous tax year by 31 January.

This is why January can feel so expensive. You are paying the final balance for last year and an advance payment for the year ahead at the same time.

You are not paying double tax, but the cash flow impact can be painful if you were not expecting it.

Why It Catches People Out

Payments on Account are often not explained clearly, especially if it is your first year in Self Assessment or your income has increased.

Many people only discover they apply when they see the bill in January. By then, it can feel overwhelming.

Without planning, this can lead to stress, late payments, or the need to dip into savings.

Can You Reduce Payments on Account?

If your income has dropped and you genuinely expect to earn less this year, you may be able to reduce your Payments on Account.

However, this needs to be done carefully.

If you reduce them too far and your income does not drop as expected, HMRC will charge interest on the underpaid amount.

This is why it is important to base any reduction on realistic figures, not guesswork.

How to Plan for Payments on Account

The best way to avoid a January shock is to plan ahead.

That means:

• Understanding whether Payments on Account apply to you

• Knowing how much you are likely to owe

• Setting money aside throughout the year

• Reviewing your position well before the deadline

When Payments on Account are planned for properly, they become manageable rather than stressful.

The Bottom Line

Payments on Account are not a penalty and they are not double tax. They are simply HMRC asking for part of your tax early.

The problem is not the system itself, but being caught off guard by it.

If you are not sure whether Payments on Account apply to you, how much you should be setting aside, or whether you should reduce them, it is worth checking sooner rather than later.

At Rhombus Accounting, we help clients understand their tax bills, plan for Payments on Account, and avoid nasty surprises. If you want clarity and confidence around your tax position, get in touch and we will talk it through with you.

Meet Lewis

Lewis is a professional accountant and founder of Rhombus Accounting. He regularly shares his knowledge and best advice here on his blog and on other channels such as LinkedIn.

Book a call today to learn more about what Lewis and Rhombus Accounting can do for you.