What Is a Payment on Account?
A payment on account is an advance payment towards your next Self Assessment tax bill. Instead of waiting until your tax is finally worked out and paying it all in one go, HMRC asks you to pay some of it early, based on what you owed the year before.
The idea behind it is simple enough. Employees have tax taken from their wages every month through PAYE, so HMRC collects little and often across the year. The self employed, and others in Self Assessment, would otherwise pay nothing until the deadline and then a large lump sum. Payments on account are HMRC's way of pulling the self employed onto roughly the same footing, spreading the collection so the tax comes in through the year rather than all at once.
The part that trips people up is that a payment on account is not an extra tax. It is the same tax, just paid sooner. You are not being charged twice. You are paying this year's bill in advance, in two slices, then squaring up the difference later. Once you understand that, the whole system stops feeling like a penalty and starts making sense.
How Payments on Account Work
The mechanics come down to a few fixed rules.
Each payment on account is half of your previous year's tax bill. HMRC assumes, reasonably enough, that this year will look much like last year, so it splits last year's liability into two and asks for each half in advance.
There are two deadlines every year:
- 31 January, the first payment on account, due on the same day as the balance of the previous year's tax.
- 31 July, the second payment on account.
So a typical Self Assessment taxpayer makes payments in January and July, every year, for as long as they stay in the system. Payments on account cover your Income Tax and, if you are self employed, your Class 4 National Insurance. They do not include Capital Gains Tax or student loan repayments. Those are always settled separately in the balancing payment, never spread across the two instalments.
A Worked Example
The rules are much clearer with numbers, so here is a straightforward case.
Say your tax bill for the 2024/25 tax year comes to £4,000. That figure is due by 31 January 2026. But because it is over the threshold, HMRC also asks for your first payment on account towards 2025/26 on the same date, equal to half of the £4,000, so £2,000.
That means on 31 January 2026 you actually pay £6,000: the £4,000 you owe for last year plus the £2,000 advance for this year. Then on 31 July 2026 you pay the second payment on account of £2,000. Between the two dates you have handed over £4,000 towards a year that has not even finished yet.
The first January is always the painful one, because you settle an entire year's bill and hand over the first advance at the same time. It is why so many people are caught out in their second year of self employment, when the tax that felt manageable in year one suddenly arrives with a payment on account bolted on top. Knowing it is coming is half the battle.
The Balancing Payment
Now fast forward. Your actual 2025/26 tax bill turns out to be, say, £5,000. You have already paid £4,000 towards it through the two payments on account. The remaining £1,000 is called the balancing payment, and it is due by 31 January 2027, alongside the first payment on account for the next year.
If your income falls and your real bill comes in below what you paid in advance, the reverse happens. Say the 2025/26 bill is only £3,000 against £4,000 already paid. You are £1,000 in credit, and HMRC either refunds it or sets it against your next payment. Nobody loses out either way. The payments on account are only ever estimates, trued up once the real figure is known.
Who Has to Make Payments on Account?
You are not caught by the system automatically. HMRC only asks for payments on account when both of these are true:
- Your Self Assessment tax bill for the year was more than £1,000, and
- Less than 80 percent of your tax was already collected at source, for example through PAYE on a salary or tax deducted on savings interest.
If either test fails, no payments on account are due. So someone with a small side income producing a bill under £1,000 pays it in one go with no advance payments. Equally, someone with a large salary taxed under PAYE and only a modest amount of untaxed income will often have more than 80 percent collected at source already, which keeps them out of the payment on account regime even if their total bill is sizeable.
This is why payments on account bite hardest on the fully self employed, sole traders and company directors drawing most of their income as dividends, because very little of their tax is taken at source. If most of your income arrives untaxed, expect to be in the system.
Reducing Your Payments on Account
Because payments on account are based on last year, they can be wrong for this year. If your income has dropped, perhaps you have taken on fewer clients, gone part time or wound a business down, paying half of a bigger year's bill in advance makes no sense. You are allowed to reduce your payments on account to reflect what you genuinely expect to owe.
You can do this online through your Self Assessment account by selecting "Reduce payments on account", or by sending HMRC form SA303. It is a quick job, and for anyone whose income has genuinely fallen it can free up a lot of cash that would otherwise sit with HMRC until the balancing payment sorts it out.
But there is a trap, and it is a common one. If you reduce your payments too far and your actual bill turns out higher than your estimate, HMRC charges interest on the shortfall, backdated to the original due dates as if you had underpaid all along. In other words, reducing your payments on account is not a free way to defer tax. Cut them because your income has really dropped, not because you would rather hold onto the money. If you are unsure where this year is heading, it is usually safer to leave the payments as they are and take any refund later than to reduce them optimistically and get stung for interest.
That interest is not trivial. HMRC's late payment interest rate is set at the Bank of England base rate plus 4 percentage points, which puts it at 7.75 percent from 9 January 2026. On an underpaid payment on account running for months, that adds up.
What If You Cannot Afford It?
The second payment on account in July is the one people struggle with most, because there is no return to prepare and it can arrive as an unwelcome surprise in the middle of summer. If you genuinely cannot pay, do not simply ignore it, because interest starts running the day after the deadline and keeps building until the balance is clear.
The right move is to contact HMRC and ask about a Time to Pay arrangement, which lets you spread the payment over monthly instalments. Many taxpayers can now set this up online for Self Assessment debts up to a certain limit without even phoning. Interest still applies while the plan runs, but you avoid the harsher late payment penalties and you keep HMRC onside. Arranging it before the deadline, rather than after, always leaves you in a stronger position.
If cash flow around these dates is a recurring problem, the deeper fix is to set money aside as you earn. A rough rule for many sole traders is to move 25 to 30 percent of every payment received into a separate tax pot. Do that consistently and the January and July dates stop being a shock, because the money is already there waiting.
A Note on Corporation Tax and VAT
"Payment on account" is a phrase that also crops up in other taxes, which causes some confusion, so it is worth a quick word. Very large companies pay their corporation tax in quarterly instalments that are also called payments on account, but the rules and thresholds are completely different from Self Assessment. There is a separate VAT payments on account regime for businesses with very large VAT bills too. For the vast majority of people typing "payment on account" into a search box, though, the Self Assessment version described here is the one that matters.
Our View
Payments on account are one of the most misunderstood parts of Self Assessment, and almost all of the pain comes from surprise rather than the tax itself. The system is logical once you see it clearly: you pay this year's tax in two advance slices based on last year, then settle the difference. There is nothing to fear in the mechanics.
Where it goes wrong is timing and cash flow. The double hit in the first January, the forgotten July payment, the temptation to reduce payments to ease a squeeze and the interest that follows, these are the traps we see year after year. Every one of them is avoidable with a bit of forward planning.
Our honest view is that the taxpayers who sail through payments on account are simply the ones who know the numbers in advance and put money aside as they go. It really is that ordinary. Get the return done early rather than at the last minute, know exactly what is due in January and July, keep a tax pot topped up, and only reduce payments when your income has genuinely fallen. Do those few things and payments on account become a non event.
How IAK Can Help
We look after sole traders, freelancers, content creators and limited company directors across North London, and getting Self Assessment right, payments on account included, is bread and butter work for us. Our personal tax team prepares your return early so you know both your balancing payment and your payments on account long before they fall due, with no nasty January surprise. Where your income has changed, we work out whether reducing your payments is the right call or a false economy, so you never end up paying HMRC interest by mistake. And our tax planning makes sure the salary and dividend mix, if you run a company, is set up to keep the whole bill as low as it legally can be.
If you are staring at a July payment on account you were not expecting, or you are not sure whether you even need to make one, contact us for a free consultation. We will tell you exactly what you owe and when, in plain English.
Sources
- Understand your Self Assessment tax bill: payments on account, GOV.UK, on the £1,000 threshold, the 80 percent collected at source rule, the two deadlines, the half of last year's bill calculation, what is excluded, and reducing payments.
- Pay your Self Assessment tax bill, GOV.UK, on payment methods and deadlines.
- If you cannot pay your tax bill on time, GOV.UK, on Time to Pay arrangements for Self Assessment.
- Rates and allowances: HMRC interest rates for late and early payments, GOV.UK, on the late payment interest rate of 7.75 percent from 9 January 2026 (base rate plus 4 percentage points).