Self-assessment collects tax three times a year, not once. In the first year that means the whole liability and the first instalment of the next year fall due on the same day, 150% of the tax, with no warning unless somebody gives it.
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The Self-Assessment Payment Cycle
Self-assessment collects tax in three payments per year, not one, and the timing catches out almost everyone in their first year of trading or their first year with a significant untaxed income source.
| Date | What is due |
|---|---|
| 31 January | The balancing payment for the tax year just ended, plus the first payment on account for the year already running |
| 31 July | The second payment on account |
| Following 31 January | The balancing payment for that year, plus the first payment on account for the next |
How Payments on Account Work
- Each is half of the previous year’s net income tax liability, together with Class 4 National Insurance where applicable.
- They are based on the last known figure, not on the current year. A good year produces large instalments for a year that may be much worse.
- Capital gains tax is not included in the payment on account calculation, and is paid with the balancing payment, subject to the separate 60-day reporting and payment obligation on UK residential property.
- Tax deducted at source reduces the figure on which the instalments are based.
When payments on account are not required
- Where the previous year’s net liability was below the de minimis threshold; or
- where more than a specified proportion of the previous year’s tax was deducted at source or accounted for by other means.
Both tests are mechanical, and both are worth checking rather than assuming HMRC has applied them correctly.
Reducing Payments on Account
Where the current year’s liability will be lower (profits have fallen, the business has ceased, income has become taxed at source, or a large one-off item is not repeating) a claim can be made to reduce the payments on account.
Two practical points:
- Reduce on evidence, not optimism. A client under cash flow pressure will want the instalments reduced; the adviser’s job is to base the figure on the expected outcome, not the desired one.
- Revisit it. A reduction claimed in January can be revised in July if the position has changed.
What Happens If You Pay Late
- Interest runs from the due date on any amount paid late, including on payments on account. There is no reasonable excuse defence to interest. It is compensation for money held late, not a penalty.
- Late payment penalties apply to the balancing payment, at defined intervals after the due date. They do not apply to payments on account, which attract interest only. That distinction is worth knowing, because it means a client who cannot pay everything should generally prioritise the balancing payment.
- Repayment interest is credited where payments on account exceed the eventual liability, at a materially lower rate than that charged on late payment.
Our resource on late payment penalties and interest sets out the penalty regimes and the reasonable excuse position in more detail.
Allocation of Payments
Where a taxpayer owes several amounts, how a payment is allocated matters. It determines which liability continues to attract penalties and interest.
- Specify the allocation when paying. Use the correct reference and, where several years are outstanding, tell HMRC in writing which liability the payment is for.
- Check HMRC’s allocation. Misallocated payments are a very common cause of apparently unpaid liabilities, enforcement action and penalty notices for tax that was in fact paid.
- Ask for a statement of account for each year and each head of tax when the position looks wrong.
Managing the Cycle
- Warn clients in year one about the 150% January. This is the single most useful thing an adviser does in this area.
- Prepare the return early. Knowing the balancing payment in April rather than January gives nine months to plan for it, and allows an informed decision on reducing the July instalment.
- Set money aside as income arises, ideally in a separate account.
- Where the client cannot pay, act before the due date. A Time to Pay arrangement agreed before a penalty trigger date prevents the penalty that would otherwise arise: see Time to Pay.
- Prioritise the balancing payment over the payment on account where funds are short, because only the former attracts late payment penalties.
- Watch for a determination. Where a return has not been filed, HMRC may issue a determination under s28C TMA 1970 which cannot be appealed and can only be displaced by filing the return: see HMRC determinations.
Frequently Asked Questions
Why is my first January bill so large?
Because the balancing payment for the tax year just ended falls due on the same day as the first payment on account for the year already running. On a straightforward case that is 150% of the year’s tax in a single day. In the first year of trading nothing is due until that date, so the whole cycle arrives at once.
Can I reduce my payments on account?
Yes, where the current year’s liability will genuinely be lower: profits have fallen, the business has ceased, income has become taxed at source, or a one-off item is not repeating. But if the reduction proves excessive, interest runs on the shortfall from the original due dates, and a penalty can follow where the claim was made without reasonable grounds. Base it on a computation, and record the basis.
Are there penalties for paying a payment on account late?
Interest yes, penalties no. Late payment penalties attach to the balancing payment at defined intervals after the due date; payments on account attract interest only. That distinction matters practically. A client who cannot pay everything should generally prioritise the balancing payment, because only that carries penalties on top of the interest.
When are payments on account not required?
Where the previous year’s net liability was below the de minimis threshold, or where more than a specified proportion of the previous year’s tax was deducted at source or accounted for by other means. Both tests are mechanical and both are worth checking rather than assuming HMRC has applied them correctly.
HMRC says I have not paid, but I have. What has happened?
Most often a misallocated payment. Where several years or several taxes are outstanding, how a payment is allocated determines which liability continues to attract penalties and interest. Specify the allocation in writing when paying, and ask for a statement of account for each year and each head of tax when the position looks wrong. Misallocation is a very common cause of enforcement action on tax that was in fact paid.