What is Payment on Account?
A payment on account is an advance payment made towards a future or existing liability, commonly referring to HMRC's system of collecting Self Assessment tax in two instalments.
Payment on account has two main meanings in UK business: advance payments towards invoices, and HMRC's system for collecting tax in advance.
- **HMRC Payments on Account (Self Assessment):**
- If your Self Assessment tax bill is over £1,000 (and less than 80% was collected at source), HMRC requires you to make **two advance payments** towards next year's tax bill:
- 1st payment: Due **31 January** (during the tax year)
- 2nd payment: Due **31 July** (after the tax year ends)
Each payment is 50% of the previous year's tax bill. Any remaining balance (a "balancing payment") is due the following 31 January.
Example: Your 2024/25 tax bill is £6,000. For 2025/26, HMRC assumes a similar bill: - 31 January 2026: Pay £3,000 (1st payment on account) - 31 July 2026: Pay £3,000 (2nd payment on account) - If the actual 2025/26 bill is £7,000, you pay £1,000 balancing payment on 31 January 2027
Reducing payments on account: If you know your income will be lower next year, you can apply to reduce your payments on account. But be careful — if you reduce too much, HMRC charges interest on the shortfall.
Payments on account in invoicing: In a commercial context, a payment on account simply means a partial or advance payment made against a larger invoice or ongoing work. Common in construction (stage payments) and professional services (retainers).
For freelancers: Budget for payments on account from your first year of trading. Many new freelancers are caught off guard by the "double payment" in their second January — both the balancing payment for the previous year and the first payment on account for the current year.
Examples
A self-employed plumber pays two £2,500 payments on account towards their 2025/26 tax bill
A client makes a £5,000 payment on account before a £20,000 project begins
A freelancer applies to reduce payments on account after moving to part-time work
Related Terms
Net 30
Net 30 is a payment term meaning the full invoice amount is due within 30 days of the invoice date.
Accounts Receivable
Accounts receivable (AR) is the money owed to a business by its customers for goods or services delivered but not yet paid for.
Proforma Invoice
A proforma invoice is a preliminary bill sent before goods are delivered or services are completed, showing the estimated costs and terms.
Cash Flow
Cash flow is the movement of money into and out of a business over a given period, determining whether the business has enough cash to meet its obligations.
Time to Pay (TTP)
Time to Pay is an arrangement with HMRC that allows businesses or individuals to pay their tax bill in instalments over an agreed period when they cannot pay in full.