The first January is 150% of the tax, and nobody warns you
Somebody goes self-employed. They do everything right. They put money aside for tax as they go, and by January they have saved every penny of what they owe.
They are still 50% short on the night.
HMRC's own worked example is blunt about it: a bill of £3,000 produces £4,500 due on 31 January, and another £1,500 on 31 July. On a £20,000 liability the surprise is £10,000.
Why one date carries two bills
31 January is doing two jobs at once, and they are easy to conflate into one:
- The balancing payment for the tax year you have just filed.
- The first payment on account for the tax year that is already running.
In a first year there is nothing already paid against the old year, so both arrive whole. From the following January it settles down, because the payments on account you have made are credited against that year's bill. It is a one-off shock rather than a permanent state, but it is a very large one-off.
It is worth being clear that this is not a penalty. No rule has been broken, nothing can be appealed, and no amount of arguing changes it. It is next year's tax collected early.
The threshold test is not against your headline bill
Payments on account are only required where the relevant amount is £1,000 or more, and the relevant amount is assessed income tax plus Class 4 National Insurance, less tax already deducted at source.
It is not the number on the front of your calculation, and treating it as such is the second most common error in this area. There is also a second exemption that many people qualify for without ever hearing about it: if more than 80% of your assessed tax was already collected at source through PAYE or CIS, you make no payments on account at all.
Two things do not spread across the year
Capital gains tax and student loan repayments are excluded from payments on account entirely. They fall wholly into the January balancing payment. So a year containing a property or share disposal produces a far lumpier January than the headline tax figure suggests.
Class 4 National Insurance goes the other way and is included in the relevant amount, which surprises people in the opposite direction: their payments on account are larger than they expected because National Insurance is in there too.
Reducing them, in both directions
If you know your income has fallen, you can claim to reduce your payments on account using form SA303 or online. The claim must be made before the following 31 January.
Reduce them too far and interest runs on the shortfall from each original due date, so an optimistic reduction is not free. Doing it negligently or fraudulently carries a penalty of up to the full amount of the underpayment created.
Going the other way, a payment on account can never exceed 50% of the previous year's relevant amount, even where it is already obvious this year will be far larger. There is no obligation to top it up, though putting the difference aside is obviously sensible.
Being late costs more than one thing
The filing penalty and the payment penalty are separate, and both apply. £100 the day after the deadline even if you owe no tax at all. 5% of the unpaid tax at 30 days. £10 a day from three months, capped at £900. 5% again at six months and at twelve, with interest at 7.75% running throughout.
And registering late does not buy you time on the money. HMRC allows three months from the date of its letter to file, but the tax is still due on 31 January. Registration itself is due by 5 October following the end of the tax year for anybody who has not filed before.
Common questions
Why is my January bill more than my tax bill?
Because 31 January carries two separate things: the balancing payment for the tax year you have just filed, and the first payment on account for the tax year already in progress. In a first year there is nothing already paid against the old year, so both land whole and the total is 150% of your tax. HMRC’s own example turns a £3,000 bill into £4,500 due in January and £1,500 more in July.
Is that a penalty? Can I appeal it?
No and no. It is not a penalty, no rule has been broken and there is nothing to appeal. It is simply next year’s tax collected in advance. The only real defence is knowing it is coming, which is why it catches almost everybody in their first year and almost nobody after that.
Do payments on account always apply?
No. There are two exemptions. If your relevant amount is under £1,000 you make none, and if more than 80% of your assessed tax was already collected at source through PAYE or CIS you make none either. That second one catches a lot of people with a job plus a side income who never knew the test existed.
What exactly is the relevant amount?
Assessed income tax plus Class 4 National Insurance, less tax already deducted at source. It is not the figure on the front of your calculation, and getting that wrong is the second most common error here. Capital gains tax and student loan repayments are excluded from it entirely.
Why does my capital gain not spread across the year?
Capital gains tax and student loan repayments are both excluded from payments on account, so they fall wholly into the 31 January balancing payment. Class 4 National Insurance works the opposite way and is included, which surprises people in the other direction. So a year with a large gain in it produces a much lumpier January than the headline tax figure suggests.
Can I reduce my payments on account?
Yes, on form SA303 or online, if you genuinely expect your income to be lower. Be careful: if you reduce them too far, interest runs on the shortfall from each original due date, and reducing them negligently or fraudulently carries a penalty up to the full amount of the underpayment created. Going the other way there is no obligation to increase them, even if you already know this year will be much bigger.
What happens if I miss the deadline?
The filing penalty and the payment penalty are separate and both apply. £100 the day after the deadline even if you owe nothing, 5% of the unpaid tax at 30 days, £10 a day from three months up to £900, and 5% again at six and twelve months, with interest at 7.75% running throughout. Registering late does not move the payment date either: HMRC gives three months from its letter to file, and the tax is still due 31 January.