Payments on Account Explained
Learn how Self Assessment payments on account work, when to pay and how to reduce them if your income falls.
If you complete a Self Assessment tax return, you may have been surprised the first time HMRC asked you to pay more than the tax shown on your return. That extra amount is almost always payments on account: advance instalments towards next year’s bill. They catch out many sole traders and freelancers in their first profitable year, so it pays to understand how they work, when they fall due and what you can do if your income drops. This guide explains the system in plain terms and shows you how to plan for it.
What Payments on Account Are
Payments on account are advance payments towards your next tax bill. Because Self Assessment income is not taxed at source, HMRC assumes your earnings will be broadly similar year to year and asks you to pay the coming year’s tax in two instalments rather than one lump sum afterwards.
Each payment on account is normally half of your previous year’s tax liability. They apply to your Income Tax and, where relevant, Class 4 National Insurance, but they do not include any Capital Gains Tax or student loan repayments, which are settled separately.
You will generally be asked to make payments on account unless one of two things is true:
- Your last Self Assessment bill was below a small threshold set by HMRC, or
- More than 80% of the tax you owed was already collected at source, for example through PAYE.
How HMRC Calculates Them
The calculation is mechanical and based entirely on the year just gone. HMRC takes your total Self Assessment liability for the tax year, then splits it into two equal halves due across the following year. You do not estimate your future profit yourself unless you choose to reduce the payments (more on that below).
Calling your full liability L, the cycle breaks down as follows:
| Item | Amount |
|---|---|
| Tax due for the year just filed | Your full liability (L) |
| First payment on account | Half of L |
| Second payment on account | Half of L |
So in a typical year you pay roughly one and a half times a single year’s tax in your first payment window: the balance of the year just filed, plus the first instalment towards the next. This front-loading is what makes the first bill feel so steep.
Payment Dates: January and July
Payments on account fall due on two fixed dates each year:
- 31 January — the first payment on account, due alongside any balancing payment for the previous tax year.
- 31 July — the second payment on account.
Missing these dates triggers interest at the applicable HMRC rate, and prolonged non-payment can lead to penalties. Keeping on top of the key filing deadlines helps you avoid an unwelcome surprise. For a fuller view of the return cycle, see our guide to Self Assessment step by step .
The Balancing Payment
Because payments on account are only an estimate based on last year, they rarely match your actual liability exactly. The difference is settled through the balancing payment.
When you file the following year’s return, HMRC compares your real tax bill with what you have already paid on account:
- If you owed more than your two instalments covered, the shortfall is the balancing payment, due on the next 31 January.
- If you owed less, HMRC refunds the overpayment or sets it against future amounts.
That 31 January date therefore often carries two things at once: the balancing payment for the year just filed and the first payment on account for the year ahead. Budgeting for both is essential.
When You Can Reduce Them
You are allowed to apply to reduce your payments on account if you genuinely expect your income, and therefore your tax, to be lower than the previous year. Common reasons include:
- A drop in trading profit or losing a major client
- Moving from self-employment into employment where tax is collected through PAYE
- A temporary break, parental leave or reduced hours
- A one-off spike last year that will not repeat
You make the claim through your Self Assessment account or on the return itself, telling HMRC the revised figure you expect to owe.
The Risk of Reducing Too Far
Reducing payments on account can ease your cash flow, but it carries a real risk. If you cut them below what you actually end up owing, HMRC will charge interest on the difference from the original due dates, as if the money had always been payable. In effect, an over-optimistic reduction becomes a backdated underpayment.
The sensible approach is to base any reduction on a realistic forecast rather than wishful thinking. Strong bookkeeping and a simple projection make this far easier. Our guidance on setting aside money for tax and cash flow forecasting basics can help you judge the figure with confidence.
Your First Year of Trading
In your first year of self-employment, there are no payments on account because there is no prior-year liability to base them on. That sounds like good news, but it creates a well-known trap: your first 31 January after a profitable year can demand the full tax for that year plus the first payment on account for the next. Many new sole traders are caught out by paying roughly one and a half years of tax at once, so treat that first bill as the larger one to plan for.
Budgeting for the Bill
The payments-on-account system rewards anyone who plans ahead. A few habits make it manageable:
- Set aside a percentage of every payment you receive into a separate tax savings pot.
- Keep your records current so you can estimate your liability long before the deadline.
- Diarise both 31 January and 31 July as fixed financial commitments.
- Review whether a reduction is justified, but only on the basis of real figures.
Good record keeping underpins all of this, whether you use the cash basis versus accruals method or work with an accountant. As Making Tax Digital extends to Income Tax, keeping digital records throughout the year will also make these estimates more reliable.