What is a Payment on Account?

What is a Payment on Account?
A Guide for New Business Owners and Self-Employed Individuals

Starting a business or becoming self-employed comes with exciting opportunities but also new responsibilities, including understanding your tax obligations. A common question for many new entrepreneurs is: what is a payment on account? In this guide, we’ll explain what it is, when you need to pay it, and how to manage your tax responsibilities without surprises.

When Do You Need to Register for Self-Assessment?

If you’re new to self-employment or running a business, one of your first steps is registering for self-assessment. You need to do this by 5th October following the end of the tax year in which you started your business. This ensures HMRC knows you need to submit a tax return. Missing this deadline can lead to penalties.

For instance, if you started trading in June 2024, you’ll need to register for self-assessment by 5th October 2025. Registering early gives you peace of mind and helps avoid fines.

How Much Should You Save for Your First Tax Bill?

A common question for new business owners is how much to set aside for taxes. Keeping track of your profits and drawings is a sensible way to estimate how much tax you’ll owe at the end of the tax year. Depending on if you are self-employed or a director, may depend on how you are remunerated and what tax rates will be applicable to you.

Additionally, remember that if your tax bill is over £1,000, you may also have to make a payment on account, which could increase what you owe in your first year of trading.

What is a Payment on Account?

So, what is a payment on account? It’s a system HMRC uses to collect tax in advance, based on your previous year’s tax bill. If your tax bill exceeds £1,000, you’ll usually need to make two advance payments—called payments on account—towards your next year’s tax liability.

Each payment is 50% of the previous year’s tax bill, and they are due by 31st January and 31st July. This can sometimes catch new business owners off guard, as they might not expect to pay towards their next year’s taxes before they’ve even started trading.

When Do You Need to Pay on Account?

You’ll need to make a payment on account if your tax liability is more than £1,000 and less than 80% of your tax has already been collected through PAYE or other deductions. These payments are usually split into two instalments: the first by 31st January and the second by 31st July.

For example, if your first-year tax bill is £2,000, you’ll pay that amount in January. You will then also be asked to make a payment on account, which could be another £1,000 in January and another £1,000 by July. That’s why saving regularly throughout the year is crucial.

How Can This Catch New Business Owners Off Guard?

New business owners or self-employed individuals may only expect to pay their first-year tax bill without realising they also need to pay in advance for the following year. This can lead to a cash flow crunch if you haven’t saved enough.

The key is to know what a payment on account is and plan for it from the beginning. Setting aside funds regularly will prevent unexpected surprises when those payments are due.

Tips to Manage Your Tax Responsibilities

• 

  Register Early: Don’t wait until the last minute—register for self-assessment before the 5th October deadline.

• Save Consistently: Work out what you plan to draw from your business/what profits you’ll make, and save to cover your tax bill and any payments on account.
• Stay Organised with Deadlines: Mark your calendar with these important dates:
  • 5th October: Register for self-assessment.
  • 31st January: Submit your tax return and pay your tax bill and the first payment on account.
  • 31st July: Pay your second payment on account.
    

     

New to Self-Employment? Stay on Top of Your Tax Deadlines

Navigating self-employment taxes can be complex, but knowing what a payment on account is and preparing for it will help you avoid financial surprises. Be sure to register on time, save regularly, and know your key tax deadlines. This way, you can focus on growing your business with confidence.

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