Why is my first January tax bill so big?
The first time you owe Self Assessment tax, HMRC asks for the year you've just finished plus half of it again, as an advance on next year. Put in your tax bill and see exactly what falls due on 31 January and 31 July, and why that first one stings. Free, no sign-up.
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An advance on next year's tax, paid in two halves.
Payments on account are advance payments towards your Self Assessment tax bill. HMRC assumes next year's tax will look much like this year's, so it asks you to pay it in two instalments rather than all at once. Each instalment is 50% of your previous year's liability: your income tax plus Class 4 National Insurance, but not Capital Gains Tax or student loan repayments.
The two payments fall due on 31 January and 31 July. The January one lands alongside the balancing payment for the tax year that has just been assessed, which is what makes the first one feel so heavy.
Here's the first-January shock spelled out. Say your tax bill for the year is £4,000. In the January you first enter the system you pay that £4,000 in full, plus a first payment on account of £2,000 (half of £4,000), so £6,000 leaves your account in one go. That's 150% of the year's tax. The remaining £2,000 follows on 31 July. In later years the January bill is just the balancing payment (the difference between your actual bill and the payments on account you already made) plus that year\'s first payment on account, so it settles down after the first shock.
You're let off payments on account in two cases: if your previous year's bill was under £1,000, or if more than 80% of your tax was already collected at source, for example through PAYE. In either case you simply pay what you owe by 31 January and nothing more.
If your income has dropped and the payments look too high, you can apply to HMRC to reduce them. Be careful not to under-reduce, though: if you cut them below what you actually end up owing, HMRC charges interest on the shortfall. For the official detail, see gov.uk payments on account.
Know the bill before it lands.
Stead's landlord tools log rent and expenses against each property and build a tax-year P&L as you go, so when Self Assessment season comes round there are no nasty surprises and nothing to dig out at the last minute.