If you’ve just received your first Self Assessment tax bill and nearly fell off your chair, you’re definitely not alone.
Every year, thousands of UK business owners are caught out by payments on account. They expect to pay tax on last year’s profits, only to discover HMRC is asking for next year’s tax upfront as well.
The good news is that this doesn’t mean you’ve done anything wrong. It’s simply how the Self Assessment system works. Once you understand it, it becomes much easier to plan for.
What Are Payments on Account?
The first thing to know is that your tax bill is often made up of more than one payment.
If your Self Assessment tax bill is over £1,000 and most of your tax hasn’t already been collected through PAYE, HMRC will usually ask you to make payments on account.
These are advance payments towards your next tax bill.
Instead of waiting until next January, HMRC assumes you’ll earn a similar amount next year and asks you to pay part of that tax in advance.
This often comes as a complete surprise to first-time taxpayers.
Why Is My First Tax Bill So Much Higher?
Here’s where many business owners get caught out.
Imagine your tax bill for your first year is £6,000.
Instead of simply paying £6,000, HMRC may ask for:
- £6,000 for the tax you’ve already owed
- £3,000 as your first payment on account
- Another £3,000 by 31 July as your second payment on account
That means you’ll pay £9,000 in January, followed by another £3,000 in July.
It feels like you’re paying extra tax, but you’re not.
You’re simply paying part of next year’s tax earlier.
When your next tax return is completed, those payments are deducted from the final amount you owe.
Why Does HMRC Do This?
It can feel unfair when you’re trying to grow your business, but HMRC introduced payments on account to spread tax payments throughout the year rather than collecting everything after the event.
Once you’re in the system, it often becomes easier to budget because you’re paying tax more regularly instead of facing one large bill every January.
The difficult part is usually the very first year.
What If My Income Is Going Down?
Not every business earns the same amount every year.
If you know your profits will be lower, you may be able to apply to reduce your payments on account.
However, it’s important to be realistic.
Reducing them too much could mean interest being charged if it turns out you underpaid.
If you’re unsure, it’s worth speaking to your accountant before requesting a reduction.
How Can I Avoid This Shock Next Year?
The best way to avoid another surprise is to build tax planning into your regular routine.
A few simple habits can make a huge difference.
- Put money aside every month for tax.
- Review your profits regularly.
- Keep your bookkeeping up to date.
- Know when your tax deadlines are approaching.
- Check whether your expected profits are changing during the year.
Many business owners find that using Xero gives them a much clearer picture of how their business is performing throughout the year, making it easier to budget for future tax payments.
Practical Tips If You’re Worried About Paying
Opening a large tax bill can be stressful, especially if you weren’t expecting it.
If paying the full amount is going to be difficult, don’t ignore it.
Instead:
- Speak to your accountant as soon as possible.
- Check whether your payments on account can legitimately be reduced.
- Contact HMRC before the payment deadline if you may need a Time to Pay arrangement.
- Start setting money aside immediately for your July payment if you haven’t already.
The earlier you act, the more options you’ll usually have.
The Good News
Almost everyone who pays Self Assessment for the first time is surprised by payments on account.
The important thing is remembering that this isn’t an additional tax. It’s simply paying some of next year’s bill in advance.
Once you’ve been through the process once and start planning ahead, future tax bills become much more predictable and far less stressful.
If you’ve received your first Self Assessment bill and you’re unsure why it’s so high, don’t panic. Understanding how payments on account work is the first step towards taking control of your business finances.
Need help making sense of your tax bill? Book a call with us and we’ll talk you through what you owe, why you owe it and what you can do now to make future tax bills much easier to manage.
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