Why has my tax bill jumped so much? A primer on payments on account

If your self-assessment tax bill is much higher than expected, read on – this is for you.

Or, if you’ve just encountered the phrase “Payment on Account” and you aren’t sure what it’s all about, this is also for you.

Like many of us, HMRC prefers to have its money in advance in case traders go belly up. So, once you earn enough profit, HMRC gets you on a system of paying in advance. 

31 January 2024

• Deadline to file your self-assessment tax return for 2022-2023.
• If you earned more in 2022-2023 than in 2021-2022, you’ll have to pay the extra at this point.
• If you earned less in 2022-2023 than in 2021-2022, the credit goes towards your payments due for 2023-2024.
• Pay the first half of your estimated tax bill for 2023-2024.

When you retire, it looks like this:

31 Jan 

• Pay the first half of your estimated tax bill for your final tax year

5 April 

• Finish earning money for your final tax year

31 July 

• Pay the second half of your estimated tax bill for your last tax year

31 Jan 

• Deadline to file your final self-assessment tax return

• Make a payment for the difference, if you earned more in your last tax year than the year before it

• Get a refund if you earned less in your last tax year than the one before it.

So it all comes out in the wash at the end.

That point happens when your income tax + Class 4 NICs (National Insurance Contributions) total more than £1,000.

The difference between every other supplier in your life and HMRC is that the others tend to stick to one method – either you pay them in advance, or you pay them afterwards. HMRC is the only one I can think of that has you start on one of those and switch to the other. 

I understand why HMRC probably does it: the very first tax bill to a new trader being that much higher could easily make them fold the business, and all governments have a vested interest in encouraging businesses to start and grow. (That is, they want that sweet, sweet business tax revenue.) Changing to payment in advance after you’ve made a certain amount of profit then insulates HMRC from uncollectable debt. 

We can see why HMRC does it, but it’s not something we run across very often, so it takes a bit to get our head around what’s happening when we get that first extra-high tax bill.

Hopefully, this explanation makes the system less opaque for you. Understanding that HMRC is holding your money as a credit for you to use later may make it slightly less annoying.

Remember, you can file your return any time from 6 April onwards, but still don’t need to pay until 31 January. It gives you almost 10 months to save up for the bill.

If you’re not sure whether you owe anything:

1. Sign in to your HMRC online account (by going to gov.uk and searching for “HMRC login”).
2. View your latest Self Assessment return
3. View Statements

That screen will show you payments you’ve already made and payments you need to make still.

Keeping on top of your bookkeeping through the year helps you have a better idea of what you’ll owe when.