Payments on account can take people by surprise, whether you’ve just filed your Self Assessment return and the bill is bigger than expected, or you’re newly self-employed and hearing the term for the first time. They’re a normal part of the system for many sole traders and landlords, just widely misunderstood.
Here’s what payments on account are, who pays them, when they’re due, and what to do if your income has dropped or you’re struggling to pay.
What Is a Payment on Account?
A payment on account is an advance payment towards your next Self Assessment tax bill. HMRC splits some taxpayers’ Income Tax and Class 4 National Insurance into two instalments instead of one annual lump sum.
Each payment is equal to 50% of your previous year’s Self Assessment liability.
Payments on account only cover:
- Income Tax
- Class 4 National Insurance contributions
They do not include:
- Capital Gains Tax
- Student loan repayments
- Class 2 National Insurance
Class 2 National Insurance was abolished for most self-employed people from April 2024, so it no longer forms part of the calculation for the majority of sole traders.
HMRC calculates this from your previous year’s tax bill, not what you expect to earn this year. Pay too little and you settle the difference as a balancing payment on 31 January. Pay too much and HMRC will normally refund it once your return is processed, although it may offset the credit against other tax you owe instead.
Who Has to Make Payments on Account?
You’ll normally need to make payments on account if both of the following apply:
- Your Self Assessment tax bill is more than £1,000.
- Less than 80% of your tax has already been collected through PAYE.
That £1,000 threshold is the tax owed, not your income.
Someone with a full-time PAYE job and a bit of freelance income on the side may never enter the payments on account system at all. Most of their tax has already come out through payroll.
The people most commonly affected are:
- Sole traders and freelancers
- Landlords receiving rental income
- People with significant untaxed investment income
A landlord with £15,000 in rental income and no PAYE deductions will usually fall within the rules. If the tax bill falls below £1,000 the following year, HMRC won’t normally ask for payments on account again.
Why Does HMRC Ask for Payments on Account?
Employees pay tax as they go because it’s deducted from their wages through PAYE. Self-employed people and landlords don’t have that deduction built in, so HMRC collects the tax separately through Self Assessment.
Without payments on account, the January bill would be large. By your second year of Self Assessment, you could be paying the tax for the year just finished and the first instalment for the year ahead at the same time.
Say your 2025/26 tax bill is £3,000. Your January 2027 payment would total £4,500:
- £3,000 balancing payment for 2025/26
- £1,500 first payment on account for 2026/27
Spreading the following year’s tax across two instalments helps HMRC collect it more evenly and prevents large unpaid balances from stacking up.
Meet the eligibility rules and payments on account are compulsory. The only way out is a tax bill below £1,000, or at least 80% of your tax already being collected through PAYE.
You can read more about payments on account on the HMRC website.
When Are Payments on Account Due?
Three dates matter each year:
- 31 January during the tax year: First payment on account, equal to 50% of the previous year’s liability
- 31 July after the tax year ends: Second payment on account, covering the remaining 50%
- 31 January of the following year: Balancing payment when you submit your Self Assessment tax return
The January deadline trips people up because it combines two separate liabilities:
- The balancing payment for the tax year that’s just finished
- The first payment on account for the current tax year
Miss a deadline and HMRC charges interest from the following day until you pay.
If you’ve overpaid through payments on account, HMRC will refund the difference or offset it against future tax.
How Much Do You Pay? A Worked Example
This is where many new sole traders get their first unpleasant surprise.
File your first Self Assessment return and you’re not just paying tax already owed. If you qualify for payments on account, you’re also making the first advance payment towards the following tax year.
Say your 2025/26 Self Assessment liability is £3,000. HMRC calculates two payments on account for 2026/27 of £1,500 each.
Your payment schedule would look like this:
- 31 January 2027: £3,000 balancing payment for 2025/26 plus a £1,500 first payment on account, making £4,500 in total
- 31 July 2027: £1,500 second payment on account
If your actual 2026/27 tax bill is £3,400, you’ll pay a balancing payment of £400 by 31 January 2028.
Come in at £2,600 instead and HMRC owes you a £400 refund once your return is processed.
Capital Gains Tax does not factor into payments on account at all. Any CGT due gets paid separately as part of the January balancing payment.
Bill below £1,000? No payments on account are triggered. You simply pay what’s due by the January deadline.
How Do You Pay?
HMRC shows what’s due on your Self Assessment statement, but nothing gets collected automatically. Getting each payment in by the deadline is your responsibility.
You can pay using:
- Online banking
- Debit card
- CHAPS for same-day payments
HMRC no longer accepts credit card payments.
You can find the available methods on HMRC’s Self Assessment payment page.
Don’t want to track the deadlines yourself? You can set up a Direct Debit or use HMRC’s Budget Payment Plan through your online tax account.
It’s worth enabling email reminders too, or using the HMRC app, so 31 January and 31 July don’t creep up on you.
Can You Reduce Your Payments on Account?
Yes, if your income has genuinely fallen.
HMRC lets you reduce your payments on account when you reasonably expect this year’s tax bill to come in lower than last year’s.
You can do this in one of two ways:
- Online: Sign in to your HMRC Self Assessment account, choose Reduce payments on account, and enter your revised estimate.
- By post: Complete form SA303 with your updated figures.
Be realistic with your estimate.
Reduce the payments too far and, if your actual bill ends up higher, HMRC will charge interest on the shortfall from the original payment dates.
Reducing your payments doesn’t remove the tax. It only adjusts what you’re paying in advance, so use it only if your income has genuinely reduced.
What If You Can’t Afford to Pay?
Worried about paying on time? Contact HMRC before the deadline, not after you’ve missed it.
HMRC offers Time to Pay arrangements for many Self Assessment debts.
You can usually set up a payment plan online if:
- Your debt is £30,000 or less
- You have no other outstanding HMRC debts
- You’re within 60 days of the payment deadline
For a larger debt, you’ll need to speak directly with HMRC’s Self Assessment payment support team.
A formal Time to Pay agreement keeps HMRC from taking enforcement action, provided you stick to the arrangement.
Interest still accrues from the original due date. But set up the agreement before the 30-day point and you’ll usually avoid the first 5% late payment penalty on any balancing payment.
It’s worth remembering that the 5% late payment penalties apply to balancing payments only. Late payments on account attract daily interest, but not those additional penalties.
If your income has dropped significantly, combining a reduction request with a Time to Pay arrangement can make sense.
Not Sure Where You Stand With Your Tax Bill?
Payments on account catch a lot of people out, especially in the early years of Self Assessment. Once you understand how they work, though, they’re much easier to plan around.
Not sure what you owe, whether your payments can be reduced, or would you simply rather have someone deal with HMRC for you? Get in touch with Reed & Co.
We’ll explain where you stand, what is due and when, and make sure nothing catches you out. The initial consultation is free. Get in touch if you’d like to talk it through.
