Payment on Account: why your second tax bill is bigger than your first

Starting your first year of self-assessment tax filing as a UK freelancer, side hustler, or small business owner is a big milestone. However, many new filers are caught off guard by their second year’s tax bill, which often feels significantly larger than the first. This is down to an HMRC mechanism called Payment on Account, and understanding how it works is crucial for managing your finances and avoiding unexpected cash flow problems.

What Are Payments on Account?

Payments on Account are advance payments towards your next tax bill, introduced by HMRC to help spread the cost of income tax and National Insurance contributions over the year. Instead of paying all your tax for the previous year in one lump sum, HMRC requires you to pay in two instalments based on your last Self Assessment tax return.

These payments are each 50% of your previous year’s tax bill (excluding student loan repayments and Capital Gains Tax). The idea is that by the time your next tax return is due, you’ve already paid most of your bill, reducing the risk of late payments and penalties.

However, for first-time filers, this system can be confusing, and the second instalment often feels like an unexpected extra tax bill, especially if your income rises or you didn’t budget for it.

Why the Second Payment on Account Can Feel Bigger

If you’ve just completed your first Self Assessment tax return, you’ll receive a bill for your tax liability up to 5 January after the end of your tax year (which runs from 6 April to 5 April). This initial bill covers your tax for that year and any balancing payment for previous years if applicable.

Alongside this, HMRC expects you to make your first Payment on Account by 31 January — this is 50% of your previous year’s tax bill. Then, by 31 July, you must pay a second instalment of the same amount. This means in your second tax year, you might be paying tax for two years almost back-to-back.

The second payment can feel bigger because it’s effectively a pre-payment for the next year’s tax, but it’s based on last year’s figures. If your income increases or you haven’t saved enough, it can catch you out.

A Worked Example: How Payments on Account Add Up

Let’s say you started freelancing in the 2022/23 tax year and made a total taxable profit of £20,000. After allowances and deductions, your tax bill calculated by HMRC is £4,000 for that year. You’ll need to pay this bill by 31 January 2024, which includes both the balancing payment for 2022/23 and the first Payment on Account for 2023/24.

1. By 31 January 2024, pay £4,000 covering your 2022/23 tax liability.
2. At the same time (31 January 2024), pay a first Payment on Account for 2023/24 of £2,000 (which is 50% of the £4,000 tax bill).
3. By 31 July 2024, pay a second Payment on Account of £2,000.
4. By 31 January 2025, submit your 2023/24 tax return and pay any balance due.

In this example, you end up paying £8,000 across the 2024 calendar year — double what you paid in your first year — because you’re paying ahead for your next year’s tax. This can feel like a shock if you haven’t prepared for it.

Can You Reduce Your Payments on Account?

Yes, if you reasonably expect your tax bill for the upcoming year to be lower than the previous one, you can apply to HMRC to reduce your Payments on Account. This is useful if your income drops or you have additional allowable expenses or reliefs that reduce your tax liability.

To reduce them, you’ll need to submit a form SA303 or use your online Self Assessment account to tell HMRC how much you expect to owe. Be cautious: if you reduce your payments too much and end up owing more, you could face interest charges on the underpaid amount.

Reducing your Payments on Account can help your cash flow but always base it on realistic estimates to avoid penalties.

What If You Owe Less Than £1,000?

If your total Self Assessment tax bill is less than £1,000, or you’ve already paid more than 80% of the tax due at source (through PAYE, for example), you won’t have to make Payments on Account. This rule is helpful for those with smaller earnings or who have tax deducted at source.

In such cases, you only pay what you owe by the balancing payment deadline, 31 January following the tax year. This means no advance payments and fewer surprises.

However, if you exceed the £1,000 threshold in future years, Payments on Account will again apply.

Practical Tips to Manage Payments on Account

• Open a dedicated savings account to put aside money for your tax bills as you earn income.
• Keep detailed and accurate records of income and expenses to forecast your tax liability.
• Use HMRC’s online Self Assessment tools and calculators to estimate your payments on account.
• Mark your calendar with key dates: 31 January and 31 July for payments, and 31 January for filing.
• Consider taking professional tax advice if your income or expenses fluctuate significantly.

Many founders and freelancers tell us that budgeting for Payments on Account from day one is the best way to avoid financial stress. As one startup founder put it:

""The first time I hit my second tax year, the Payments on Account nearly broke my bank. Since then, I’ve treated those dates like rent — non-negotiable and planned for months ahead." — Emma R., London tech startup founder"

What Happens If You Miss a Payment on Account?

Failing to pay a Payment on Account by the deadline doesn’t just delay your tax payment; it can trigger penalties and interest charges from HMRC. The penalty system is tiered, with initial fixed penalties followed by daily penalties if the payment remains unpaid.

If you realise you’re going to miss a payment, contact HMRC immediately. Sometimes, HMRC can arrange a Time to Pay agreement, allowing you to spread payments across a longer period without extra penalty.

To summarise, Payments on Account are a common cause of surprise tax bills in the second year of self-assessment. They are designed to help you spread the cost but require good planning and understanding. By knowing how they work, budgeting accordingly, and leveraging HMRC’s online tools, you can avoid cash flow problems and stay compliant.

If you’re new to self-assessment or about to file your first tax return, take the time to understand Payments on Account now. It’s one of the few tax rules that catches many people out, but with the right approach, it becomes just another manageable part of running your business.