Payments on account explained simply
Payments on account surprise many people in their early self-employed years, mainly because they feel like paying twice.
In practice, payments on account are advance payments for the next tax year. They are often split into two instalments and can create a large January bill if not planned in advance.
The key is to treat them as part of normal annual planning rather than an unexpected extra. Forecast both instalments and include them in your cashflow calendar.
If your profits drop, you may be able to reduce payments on account. Do this carefully and only when you have evidence, because underpaying can lead to extra charges.
Key points
- Forecast January and July obligations in one plan.
- Avoid spending money reserved for upcoming instalments.
- Reduce payments only with a clear lower-income case.