Why is my first tax bill so much bigger than I expected?
Payments on account mean a first self assessment bill can be half as large again as the tax actually owed for the year. Understanding why makes it survivable.
- Difficulty
- intermediate
- Time
- 12 min
- Read
- 2 min
Short answer
If your self assessment balance is above a small threshold and most of your tax is not collected at source, HMRC asks for payments on account towards next year's bill. The January payment is therefore last year's balance plus the first instalment of next year's estimate — commonly 150 per cent of what you expected — with the second instalment due the following 31 July.
This is the single most common shock in self assessment, and it is not a penalty or an error. HMRC is moving you from paying a year in arrears to paying roughly as you go, and the transition year carries the cost of both. It happens once, and it does not repeat, but it needs to be budgeted for.
Step by step
- Read the statement rather than the headline figure.Your HMRC account itemises the balancing payment for the year just filed and the first payment on account for the year in progress. They are two separate things added together.
- Understand how the estimate is made.Each payment on account is normally half of the previous year's tax liability, on the assumption that this year will be similar. It is an estimate, not a demand based on actual income.
- Note the two payment dates.31 January and 31 July. The January date carries the balancing payment for the completed year as well as the first instalment, which is why it is the large one.
- Check whether payments on account apply to you at all.They are not required where the balance is below a small threshold, or where most of your tax was already collected at source through PAYE. GOV.UK states the current conditions.
- Apply to reduce them if your income has genuinely fallen.You can ask HMRC to reduce payments on account when you expect a lower liability. Reducing them below what turns out to be due attracts interest, so base it on evidence rather than optimism.
- Budget for it from the start of the year.The reliable method is setting aside a percentage of every payment received into a separate account as it arrives. In the transition year, plan for the balancing payment plus half again.
- Use a Time to Pay arrangement rather than missing the date.HMRC has an online service for spreading a self assessment bill, and a helpline where the online route does not fit. Interest applies, but it avoids late-payment penalties and it is far better than silence.
- Watch what happens when you stop.If your income ends or drops sharply, the payments on account do not stop automatically. Reduce them, or you overpay and wait for a refund.
Questions people ask
Why is my January tax bill 150 per cent of what I owe?
Because it is the balancing payment for the year you have just filed, plus the first payment on account — half of the same figure — towards the year in progress. The second half is due on 31 July.
Can I reduce a payment on account?
Yes, if you genuinely expect a lower liability. Do it through your HMRC account. If you reduce it too far, interest is charged on the shortfall from the original due date.
What if I cannot pay?
Contact HMRC before the deadline and use the Time to Pay service. Interest still runs, but late-payment penalties are avoided and the arrangement is routine rather than exceptional.