Payments on account
HMRCHow this is worked out
⚠ The January bill is two things at once: the balance of the year just gone, plus the first instalment towards the year already running. That is what makes a first Self Assessment bill about one and a half times what people were expecting.
Each payment is half of last year's tax
HMRC assumes this year will look like last year, so it asks for half the bill in January and half in July. When the year turns out smaller you get the difference back as a lower balancing payment; when it turns out bigger you pay the shortfall in January along with the next first instalment.
⚠ Two ways out, and the second is the one people miss
No payments on account are due if last year's tax was under the threshold. They are also not due if more than 80% of your tax was already collected at source — through a PAYE tax code, or by a bank deducting it.
So an employee with a modest side income can owe several thousand pounds and make no payments on account at all, because nearly all of their tax came off a salary. Missing that test tells them to budget for half again as much as they need.
You can ask to reduce them
If you know this year will be worse, you can apply to reduce the payments on account rather than paying and reclaiming. ⚠ But if you reduce them too far, HMRC charges interest on the shortfall from the original due dates — so the safe reduction is the honest estimate, not the optimistic one.
Not everything counts
Capital Gains Tax and student loan repayments are excluded from the payments on account calculation, even though they are part of the same bill. So the figure the instalments are based on can be smaller than the bill you paid, which makes the arithmetic look wrong when it is not.
What this does not cover
Class 2 National Insurance, which is collected through Self Assessment but not through payments on account. Reducing payments, which is a claim rather than a calculation. Interest on a reduction that turned out to be too large. Time to Pay arrangements. And what happens in the year you stop trading, when the instalments carry on until you tell HMRC.
Where these figures come from
Every figure above is read from a dated rate file rather than written into the page, and each one is checked against the gov.uk page it came from. How these numbers are kept right sets out the whole process.
Late filing penalties