Payments on Account Explained: How They Work, a Worked Example and How to Reduce Them

Payments on account are advance payments towards your next Self Assessment tax bill. If your bill for the year is over £1,000 and most of your tax is not collected at source, HMRC asks you to pay half of that amount again on 31 January and half on 31 July as a deposit against the following year. They catch many people out in their first year of self-employment, when the January payment is one and a half times the bill they were expecting. This guide shows how they are calculated, with a worked example, and when you can reduce them.

What payments on account are

PAYE collects tax from employees every month through the year. Self Assessment collects it after the year has ended, which gives HMRC a cash flow problem. Payments on account are the fix: an assumption that next year's bill will be about the same as this year's, collected in two instalments during the year. They are not an extra tax. Whatever you pay on account is credited against the real bill when the next return is filed.

Who has to make them

You make payments on account if both of these are true for the tax year just filed:

• Your Self Assessment bill (Income Tax plus Class 4 National Insurance) was more than £1,000.
• Less than 80% of the tax you owed for the year was collected at source, through PAYE or tax deducted from interest, for example.

So an employee with a small amount of rental income usually escapes them, because most of their tax came through PAYE. A sole trader or a director paid mostly in dividends almost always pays them.

How they are calculated

Each payment on account is 50% of the previous year's Income Tax and Class 4 National Insurance liability. HMRC does not try to estimate your income; it simply assumes next year matches this year. The two payments fall due on 31 January (alongside any balance for the year just ended) and 31 July. When the following year's return is filed, the actual bill is compared with the two payments made, and the difference is a balancing payment due the next 31 January, or a refund.

A worked example

Sara started as a self-employed consultant in May 2025. Her 2025/26 return shows Income Tax and Class 4 National Insurance of £6,000. Nothing was collected at source.

• 31 January 2027: £6,000 balancing payment for 2025/26, plus £3,000 first payment on account for 2026/27. Total £9,000.
• 31 July 2027: £3,000 second payment on account for 2026/27.
• 31 January 2028: her 2026/27 return shows tax of £7,000. She has paid £6,000 on account, so the balancing payment is £1,000, plus the first payment on account for 2027/28 of £3,500 (half of £7,000). Total £4,500.

If her 2026/27 bill had instead been £5,000, the £6,000 already paid would produce a £1,000 refund, netted against the new payment on account of £2,500.

The first-year cash flow shock

Sara's first January payment was 150% of the tax she actually owed for the year. Nothing is being overcharged, but the timing is brutal if it has not been planned for. The practical answer is to set aside a percentage of every invoice from day one, which is what the self-employed tax calculator helps you work out, and to open a separate account for it. HMRC's budget payment plan, described in our guide to paying your tax bill, automates the saving.

Reducing your payments on account

If you know next year's bill will be lower, for example because you have stopped trading, taken a PAYE job, or profits have fallen, you can ask HMRC to reduce the payments on account. Apply online through your account or on form SA303, stating what you expect the bill to be. HMRC accepts your figure without question, but if the real bill turns out higher than your estimate, interest is charged on the shortfall from the original due dates, and a penalty can apply if the reduction was careless. Reduce to a realistic figure, not to zero on hope.

You cannot increase payments on account formally, but you can simply pay more; any excess is held as a credit.

What they do not cover

Payments on account are based on Income Tax and Class 4 National Insurance only. Capital Gains Tax, student loan repayments, the High Income Child Benefit Charge and Class 2 National Insurance are all settled in full with the balancing payment. If you sold a property or shares in the year, expect the January balancing payment to be larger than the payments on account alone would suggest.

What Cloudkeepers can do

When we file your return we send a payment schedule showing every amount and date for the next twelve months, including the payments on account, and we review whether a reduction is justified before each January. New clients in their first year get the cash flow conversation early, before the first bill lands. See the Self Assessment service.