Payments on account are responsible for a very specific facial expression made by new sole traders when they see their first proper January tax bill.

What are they?

They are advance payments towards your next Self Assessment tax bill. Broadly, each payment is normally half of the previous year’s relevant tax liability, with one due on 31 January and the second on 31 July. There are exceptions, including where the amount due is small or enough tax has already been collected at source.

Why does the first bill feel so high?

Because on 31 January you may pay the balance for the tax year that has ended plus the first payment towards the following year. If you expected only the first number, the second one has a habit of feeling personal.

What happens next year?

Your payments on account are credited against the eventual bill. If your actual liability is higher, you pay a balancing amount. If it is lower, the position is adjusted.

Can they be reduced?

If you genuinely expect the next year’s liability to be lower, you can apply to reduce payments on account. Be careful about reducing them too far because interest can arise if the reduction turns out to have been excessive.

TaxSnapper’s tax estimate can take recorded payments on account into consideration so a sole trader can get a more useful picture of what may remain to pay rather than staring at one giant unexplained number.