For many small business owners, January brings an unwelcome surprise: a tax bill that's far higher than expected. You've budgeted for your Self-Assessment tax; and suddenly HMRC asks for another payment on top.Assessment
This extra amount is called a Payment on Account, and it's one of the most misunderstood parts of the UK tax system. If you're self-employed, a director, or earning untaxed income, understanding how Payments on Account work can help you avoid cashflow stress and plan ahead with confidence.employed, a director, or earning untaxed income, understanding how Payments on Account work can help you avoid cashflow stress and At Lonaa, we see this confusion every year, especially among new clients who come to us after a shock January bill. So, let's break it down clearly and calmly.
What Are Payments on Account?
Payments on Account (POA) are advance payments towards your next year's tax bill. HMRC uses them to collect tax throughout the year instead of waiting until the following January.
You make two instalments:
Each instalment is normally 50% of your previous year's tax bill.
Example
If your 2024/25 tax bill is £4,000, HMRC will ask for:
- £2,000 in January (first POA)
- £2,000 in July (second POA)
This is in addition to the £4,000 you owe for the previous year.
So, your January payment becomes:
This is why January feels painful — it's effectively 1.5 years of tax in one go.
Why Does HMRC Do This?
If you're self-employed or receive income outside PAYE, HMRC doesn't collect tax monthly like it does for employees. Payments on Account help HMRC:employed or receive income outside PAYE, HMRC doesn't collect tax monthly like it does for employees. Payments on Account help HMRC:
- Spread tax collection across the year
- Reduce the risk of underpayment
- Keep your tax contributions aligned with your income
It's not a penalty — it's a prepayment system. But without planning, it can feel like a nasty surprise.
Who Needs to Make Payments on Account?
You must make POA if:
- Your tax bill is over £1,000, and
- Less than 80% of your tax is collected through PAYE
This includes:
- Directors taking dividends
- Anyone with significant untaxed income
Who doesn't need to make POA?
- People whose tax bill is under £1,000
- People whose tax is mostly deducted at source (PAYE)
- Those who have already paid enough through CIS deductions
- Anyone whose income has dropped significantly (and applies to reduce POA)
Why Your January Bill Felt So Big
January includes:
- Your tax for the previous year, plus
- Your first Payment on Account for the next year
If you weren't expecting the second part, the bill feels huge.
Common reasons for the shock
- You're new to Self-AssessmentAssessment
- Your income increased last year
- You didn't set aside enough for tax
- You didn't realise POA applied to you
- You filed late and had no time to prepare
This is exactly why forecasting matters — and why so many clients come to Lonaa for support after their first year in business.
Can You Reduce Payments on Account?
Yes, but only if your income is genuinely going to be lower next year.
You can request to reduce POA if:
- Your profits have dropped
- You've taken maternity or sick leave
- You've moved into PAYE employment
Important warning
If you reduce POA too much and HMRC disagrees, they'll charge:
This is why professional forecasting is safer than guessing.
How to Plan Cash Flow Around POA
Payments on Account don't have to be stressful. With the right system, you can make them predictable and manageable.
1. Set aside tax monthly
A simple rule: save 20–30% of your profits into a separate tax account.
2. Use accounting software
Accounting tools can help you:
- Track real time profittime profit
3. Review your tax position midyear
A check-in around September/October can reveal:in around
- Whether POA should be reduced
- Whether your income is trending up or down
- Whether you need to adjust your savings
4. Forecast your next year's income
Even a rough projection helps you plan for January and July.
5. Outsource your bookkeeping
Accurate records = accurate tax forecasting.
Guesswork = stress.
This is where having a small business accountant in Oxfordshire like Lonaa makes a real difference, especially if you prefer hands-on support from a local, approachable team.on support from a local, approachable team.
What Happens If You Don't Pay on Time?
HMRC charges:
- Interest from the day after the deadline
- Penalties if the payment is significantly late
Even if you can't pay in full, filing on time and arranging a payment plan is always better than ignoring it.
Final Thoughts
Payments on Account can feel confusing and frustrating, especially when you're trying to run a business and manage cash flow. But once you understand how they work, they become far more predictable.
And you don't have to manage them alone. Lonaa supports small business owners every day with clear explanations, proactive planning, and year-round tax forecasting.round tax forecasting.
Further Reading
If you'd like to read HMRC's official guidance on Payments on Account, you can find it here: Payments-on-Account
At Lonaa, we translate HMRC's rules into clear, practical steps for small business owners — so if you're unsure what your next payment should be or whether you can reduce it, we're here to help.
Need help?
Let Lonaa Help You Stay Ahead of HMRC
If your January bill was a shock, or you're unsure whether your Payments on Account are correct, Lonaa can help.
We'll:
- Forecast your tax for the year
- Tell you exactly what to set aside
- Reduce your POA if appropriate
- Handle your bookkeeping and Self-AssessmentAssessment
- Make sure you never face an unexpected HMRC bill again
Let Lonaa forecast your tax so you never get caught out by unexpected HMRC bills.