Payments on account: the January bill that's bigger than you expect

What are payments on account?

Payments on account are advance payments towards next year's tax bill. HMRC's logic is simple: if you owed tax last year, you'll probably owe a similar amount this year, so it asks you to pay some of it up front rather than waiting another twelve months.

HMRC bases the estimate on your previous year's tax bill. You pay it in two instalments, and each one is normally half of what you owed last year:

• Your first payment on account is due on 31 January.

• Your second payment on account is due on 31 July.

Then, once your next return is filed and the real figure is known, a balancing payment settles the difference. If your payments on account covered too little, you pay the shortfall. If they covered too much, HMRC refunds you.

Why the first January bill lands so hard

Here's where first-timers get caught. In the first year payments on account apply, two things fall due on the same 31 January date: the balancing payment that clears last year's tax in full, and the first payment on account towards the year ahead.

Take Emma, who lets a flat in Leeds. Her rents rose and her tax bill for the year came to £3,000. She'd put aside £3,000, expecting that to be the end of it. Instead, her January statement showed:

• £3,000 balancing payment, settling the year just gone.

• £1,500 first payment on account, half of that £3,000, towards the year ahead.

That's £4,500 due on 31 January, against the £3,000 she'd saved. A second payment on account of £1,500 then follows on 31 July. In effect, she's paying one and a half years of tax inside seven months.

Nothing has gone wrong. This is the system catching up with itself, and it only feels brutal the first time, because from the second year onwards the payments on account you've already made take the sting out of each January.

"Have I filed my return wrong?"

When that bigger bill appears, the first reaction is almost always the same: something must be broken, the return must have an error, the figures can't be right.

They usually are right. A bill that's larger than last year's isn't a sign you've made a mistake. It's the predictable result of crossing into payments on account, and HMRC working exactly as designed. The shock comes from the timing, not from an error in your return.

That forecast is the whole point. Provestor files your Self Assessment tax return, shows you the full January and July picture in advance, and checks whether your payments on account can safely be reduced before you ever commit to them.

When do payments on account apply?

Payments on account aren't triggered by every return. Two rules keep most smaller bills out of the system:

• You don't make payments on account if your last Self Assessment bill was under £1,000.

• You also don't make them if more than 80% of your tax was already collected at source, for example through PAYE on a salary or pension.

So a landlord with a modest profit, or one whose tax is mostly taken through their day job, may never see a payment on account at all. The landlords who get caught are usually those whose rental profit has grown, often as rents rise with inflation and mortgage costs reduce the relief they can claim, tipping them over the £1,000 line for the first time.

That's why this lands on more landlords every year. Nothing about your situation has to change dramatically. A rent increase alone can be enough to push last year's bill past £1,000 and pull you into payments on account.

Can you reduce your payments on account?

Yes, but carefully. Payments on account assume this year will look like last year. If you genuinely expect to owe less, because rents have dropped, a property's sold, or your costs have risen, you can claim to reduce them so you're not handing HMRC money you'll only get back later.

This is where it pays to be precise. If you reduce your payments on account too far and your actual bill comes in higher, HMRC charges interest on the shortfall, backdated to the original due dates. Reduce them sensibly and you keep cash in your pocket; reduce them too aggressively and you create a bill plus interest down the line.

Getting the figure right means forecasting this year's profit before it's finished, which is exactly the kind of judgement an accountant makes routinely. Provestor models the year ahead, sets your payments on account at a level that reflects what you'll actually owe, and submits the reduction claim properly, so you reduce what you can without walking into interest.

Once you understand that the January bill is two things stacked together, not one bill gone wrong, payments on account stop being a shock. The work is in seeing the number early and pitching it right. That's the difference between a January you've planned for and a January that blindsides you.