Payments on account, explained
Payments on account are the part of Self Assessment that catches most people off guard: HMRC asks you to pay next year's tax before you've earned the money. The rules are mechanical once you see them, and knowing the calendar is the difference between a manageable bill and a January shock.
Who has to make them
You make payments on account unless one of two exits applies: your last Self Assessment bill was under £1,000, or more than 80% of the tax you owed was collected at source (through PAYE, for example). Everyone else pays in advance, and the advance covers Class 4 National Insurance as well as income tax. Capital gains tax and student loan repayments are not included; those are settled in the balancing payment.
How the amounts are worked out
Each payment on account is half of your previous year's tax bill. HMRC assumes, in effect, that you will earn the same again:
| Date | What is due |
|---|---|
| 31 January | Balancing payment for the year just filed, plus the first payment on account (50% of that year's bill) for the current year |
| 31 July | The second payment on account (the other 50%) |
| Next 31 January | Balancing payment if the year's actual bill exceeded the two payments on account; a repayment or credit if it fell short |
The first-year squeeze
The arithmetic bites hardest the first time. Suppose your first year of trading produces a £4,000 tax bill. On 31 January you owe the full £4,000 plus a £2,000 first payment on account for the following year: £6,000, or 150% of the tax you expected. Another £2,000 follows on 31 July. Nothing has gone wrong; the system has simply moved you from paying in arrears to paying broadly in step with your earnings. Budgeting for it from month one, by putting aside a fixed share of income, is the practical defence.
Reducing your payments on account
If you know the current year's profits will be lower, you can ask HMRC to reduce your payments on account, either through your online Self Assessment account or by post on form SA303. The accepted grounds are a fall in business profits or other income, or an increase in the tax relief you are entitled to, and the claim must be made by 31 January after the end of the tax year.
Reduce with care. If you set the payments lower than the tax you actually end up owing, HMRC charges interest on the shortfall from the date each payment was due, and a deliberately or negligently understated claim can attract a penalty of up to the amount underpaid. The safe approach is to reduce only when the evidence is solid, such as a contract ending or several months of visibly lower income in your records.
A worked two-year example
Suppose Amira starts trading in the 2025–26 tax year and her first bill, filed in January 2027, comes to £4,000. Her second year is slightly better and produces a £5,000 bill. Every payment she makes looks like this:
| Date | What it is | Amount |
|---|---|---|
| 31 January 2027 | 2025–26 balancing payment (£4,000) plus first payment on account for 2026–27 (£2,000) | £6,000 |
| 31 July 2027 | Second payment on account for 2026–27 | £2,000 |
| 31 January 2028 | 2026–27 balancing payment (£5,000 bill minus £4,000 already paid) plus first payment on account for 2027–28 (£2,500) | £3,500 |
| 31 July 2028 | Second payment on account for 2027–28 | £2,500 |
Two things stand out. The first January is the painful one: £6,000 due against a year that only generated £4,000 of tax. And from the second year onwards the system settles into a rhythm in which most of each year's tax has been paid before the return is even filed, so the January balancing payment shrinks to the difference between one year and the next. Had Amira's second year been worse than her first, she could have claimed a reduction in advance rather than waiting months for a repayment.
Keeping the numbers honest through the year
Every part of this system leans on knowing your real income and expenses well before the filing deadline. If your bookkeeping lives in a drawer of statements, a mid-year check takes an afternoon; tools like our free bank statement analyzer and quarterly reporter exist to shorten exactly that job, turning statements into categorised totals you can compare against last year before deciding whether a reduction claim is justified. If you are inside Making Tax Digital, your cumulative quarterly updates give you the same early-warning picture.