Prepayment on Account When Filing Your Self-Assessment Return

Prepayments to HMRC in the UK, also known as "payments on account," are advance payments towards your tax bill for the next tax year.

If you're registered for self-assessment and your tax bill was more than £1,000 in the previous year, you usually need to make these payments.

HMRC does not require payments on account if your last self-assessment bill was less than £1,000, or if 80% or more of your tax was collected at source (e.g., through PAYE). In these cases, the concept of "enough" does not apply as no prepayments are required.

This means that if you owed £2,000 in tax for the last tax year, HMRC will ask for two payments of £1,000 each as prepayments for the current tax year.

This is the same as PAYE when you are employed, except it is paid twice a year instead of monthly.

HMRC uses the previous year's tax bill as a basis for calculating prepayments because it provides a reasonable estimate of what you might owe for the current year.

If your income and circumstances haven't changed significantly, the prepayments should cover your tax bill for the current year.

You make two prepayments each year, due on January 31 and July 31. Each payment is half of your previous year's tax bill.

After the end of the tax year, if you still owe more tax, you make a "balancing payment" by the next January 31.

If your income increases or your circumstances change such that your current year's tax bill is higher than the previous year's, your prepayments might not be enough to cover the total tax due.

In this case, HMRC will consider your prepayments insufficient, and you'll need to make a balancing payment to cover the difference.

If you expect your income to decrease or if you know your tax bill will be significantly lower than the previous year, you can apply to reduce your payments on account.

However, if you reduce your payments too much and they end up being less than the actual tax owed, you'll have to pay the difference by the next January 31 and may be charged interest on the underpayment.

This system helps spread out your tax payments throughout the year instead of paying a large amount all at once.

Penalties and prepayment

If you haven’t made your required prepayment to HMRC, then HMRC can charge interest on any unpaid tax from the date the payment was due until it is paid in full. The longer the remaining balance is unpaid, the more interest you'll have to pay.

If you miss the deadline for your balancing payment (usually January), HMRC can also impose penalties.

The penalties increase the longer the payment is overdue. For example, there may be an initial penalty for missing the deadline, followed by additional penalties if the payment is still outstanding after 30 days, 6 months, and 12 months.