Payment on account

Definition

A payment on account is an advance instalment towards a future tax bill. In Self Assessment, taxpayers over a threshold pay two payments on account towards next year's tax, in January and July.

In plain terms

HMRC asks you to pay part of next year's tax in advance, based on this year's bill. It catches people out in their first year, when the January payment can include both the balance and the first payment on account.

Why it matters for your company

Payments on account can double a first tax bill unexpectedly, so budget for them. If income falls, you can apply to reduce them. Understanding the timing helps directors plan personal cash around their dividend income.

In practice

Picture a director whose company has just had its best year yet and files its first Self Assessment return showing a healthy tax bill. The January statement doesn't just ask for that bill — it adds a first payment on account towards the following year, calculated on the assumption that income will hold steady. A second, matching instalment follows in July. For a company used to paying tax once a year, the sudden move to two advance instalments plus a balancing amount can feel like being taxed twice in the same season, even though it isn't.

The practical fix is to treat the January and July dates as fixed diary events long before either falls due, rather than reacting when the statement arrives. Reviewing management accounts in the autumn, well ahead of the January deadline, gives a director early sight of whether the coming bill will look similar to last year's or has moved because trading has changed.

Common pitfalls

The most common pitfall is treating the first year's bill as the ceiling for planning purposes and forgetting that the advance instalments are baked in from the outset, not an optional extra. Some directors also assume payments on account only apply to trading profits, when they can be triggered by any Self Assessment income above the relevant threshold, including dividends drawn from the company.

Where trading has genuinely slowed, it's worth remembering an application can be made to reduce the payments on account rather than simply paying the higher amount and waiting for a refund later — leaving cash tied up with HMRC that the business could otherwise use. Getting this wrong in either direction, overpaying unnecessarily or under-claiming without adjusting, both create avoidable cash-flow strain that a bit of forward planning removes.