Payments on account are advance instalments towards your next Self Assessment bill. HMRC asks most people who owe tax through Self Assessment to pay in two lumps, based on the assumption that next year’s liability will look much like this year’s. They catch a lot of sole traders and landlords by surprise, because the first bill can feel almost double the tax you expected. Understanding how they are calculated makes the January deadline far less alarming.
The system exists so that tax is collected closer to the point income is earned, rather than in one large arrear. If you are new to Self Assessment, this is the part of the process most likely to trip you up, so it pays to know the rules before your first statement arrives.
Who has to make payments on account?
You are asked to make payments on account when two things are true about your last Self Assessment bill. First, the tax you owed was more than £1,000. Second, less than 80 per cent of the tax you owed was collected at source, for example through PAYE on a salary or tax already deducted from certain interest.
Put the other way, HMRC does not ask for payments on account if the tax you owed last year was under £1,000, or if you paid more than 80 per cent of what you owed outside Self Assessment. That second test is why someone with a large employed salary and a small amount of self employed income often escapes the instalments, because most of their tax is already taken through their tax code.
When are payments on account due?
There are two dates each year. The first instalment is due by midnight on 31 January, the same day as your balancing payment for the previous year. The second is due by midnight on 31 July. Each payment is usually half of the tax you owed the previous year, so if last year’s bill came to £4,000, you would typically pay £2,000 in January and £2,000 in July towards the year that follows.
These payments cover Income Tax and, where it applies, Class 4 National Insurance. They do not cover Class 2 National Insurance or Capital Gains Tax, which are settled separately through the balancing payment.
How does the balancing payment work?
Payments on account are only an estimate, so they rarely match your real liability to the penny. Once you file your return and your actual tax is known, HMRC deducts the two payments on account you have already made from the total tax you owe. Anything still outstanding is the balancing payment, and it is due by 31 January following the end of the tax year.
If your income rose, you pay the shortfall as a balancing payment, and at the same time your first payment on account for the new year falls due, which is where that heavy January figure comes from. If your income fell and you overpaid, HMRC repays the difference or sets it against what you owe next.
Can you reduce your payments on account?
Yes. If you expect your next bill to be lower, perhaps because your profits or other income are falling, your tax relief has gone up, or more tax is being deducted at source, you can apply to reduce both instalments. You can do this through your online Self Assessment account or by completing form SA303 and posting it to HMRC. The claim must reach HMRC by 31 January after the end of the tax year the payments relate to.
There is a real risk if you reduce them too far. If your final bill turns out higher than the reduced figure you claimed, HMRC charges interest on the difference from the original due dates. Reducing payments is sensible when income has genuinely dropped, but guessing too low simply to ease cash flow can cost you. If you are moving your records onto Making Tax Digital for Income Tax, keeping accurate in year figures makes these decisions much easier.
What about your first year of self employment?
In your very first year you make no payments on account, because there is no previous bill to base them on. That is why the first 31 January after you start can be so steep. You settle the whole of your first year’s tax in one go, and if that bill is more than £1,000 you also pay the first instalment towards your second year at the same time, effectively one and a half years of tax on a single date. Setting money aside from the start avoids a nasty shock. Our accountancy and tax guide covers budgeting for this, and if you are weighing up your structure, our comparison of sole trader versus limited company is a useful read.
Because these figures depend on estimates and claims, HMRC enquiries into Self Assessment are common, and defending one can be costly even when your return is correct. A Solar Protect policy can cover up to £100,000 of your accountant’s fees if HMRC opens an enquiry, with no excess and using your own accountant. Learn more about tax investigation insurance or get a quote.
Reviewed by Matthew Bartlett, Director, Solar Protect. This guide is general information, not personalised tax or financial advice. Figures are correct for the 2025/26 and 2026/27 UK tax years at the time of writing.