What is Payment on account?

If your Self Assessment bill is £1,000 or more, and less than 80% of your tax was already collected at source, HMRC asks you to pay towards next year in advance. It comes in two instalments, on 31 January and 31 July, each usually half of last year’s bill.

The consequence catches almost every sole trader out once. In your first January you pay the whole of last year’s tax plus half of it again as the first payment on account, roughly 150% of the number you had budgeted for.

It is not a penalty and not a mistake. But it is the single most common reason a promising first year ends in a cash-flow crisis, so it belongs in your forecast the moment you know your first bill.