Payments on Account Explained

If you've filed your first Self Assessment return and your tax bill was higher than expected, you're not alone. Many self-employed people are surprised to discover they need to pay not just this year's tax, but also advance payments towards next year.

These advance payments are called "payments on account" — and understanding how they work can save you from a nasty financial shock.

What Are Payments on Account?

Payments on account are advance payments towards your next tax bill. HMRC collects them to spread your tax payments across the year, rather than having you pay everything in one lump sum.

The basic rule: If your Self Assessment tax bill is £1,000 or more, HMRC will ask you to make payments on account for the following year.

Each payment on account is 50% of your previous year's tax bill. You make two payments per year.

Example: Your 2023/24 tax bill is £4,000. For 2024/25, HMRC will ask for:

Payment	Due date	Amount
First payment	31 January 2025	£2,000
Second payment	31 July 2025	£2,000
Balancing payment	31 January 2026	TBD

The balancing payment settles any difference between what you paid in advance and what you actually owe.

Why Does HMRC Do This?

Employees have tax deducted through PAYE every month. Self-employed people don't — so by the time January arrives, a full year's tax is due at once.

Payments on account help by:

Spreading the cost — Instead of one large annual payment, you pay in chunks
Reducing missed payments — Smaller amounts are easier to manage
Matching cash flow — July payment aligns with mid-year income

The system assumes your income stays roughly the same each year. When income varies significantly, problems arise.

When Payments on Account Don't Apply

You won't need to make payments on account if:

Your Self Assessment tax bill is less than £1,000
More than 80% of your tax is collected through PAYE
You're in your first year of Self Assessment (no prior year to base it on)

Example: James earns £40,000 in employment (taxed via PAYE) and £3,000 from freelancing. His Self Assessment tax liability is £600. Since it's under £1,000, no payments on account are required.

The First Year Shock

The most painful moment comes at the end of your first full year of self-employment.

Scenario: Sarah started freelancing in April 2023. In January 2025, she files her 2023/24 tax return showing a £6,000 tax liability.

She owes:

Payment	Amount
2023/24 tax bill	£6,000
First payment on account	£3,000
Total due 31 January 2025	£9,000

Sarah expected to pay £6,000, but she owes £9,000. The extra £3,000 is an advance for next year.

This catches many new freelancers off guard. By year two, the payments even out — but that first January can be brutal.

How the Balancing Payment Works

At the end of the tax year, HMRC calculates what you actually owe and compares it to what you've already paid.

Example continued: Sarah's 2024/25 tax liability is £5,500.

Payments made	Amount
First payment (Jan 25)	£3,000
Second payment (Jul 25)	£3,000
Total paid	£6,000

Since she only owes £5,500, she's paid £500 too much. In January 2026, she'll receive:

A refund of £500, or
Credit applied to her next payments on account

Her new payments on account for 2025/26 will be based on £5,500 (50% = £2,750 each).

When You Pay More Than Expected

If your income increases, you'll owe a balancing payment.

Example: Tom's 2023/24 tax bill was £4,000. He paid £2,000 in January and £2,000 in July. But his 2024/25 income increased, and his actual tax bill is £6,000.

Calculation	Amount
Tax owed	£6,000
Already paid	£4,000
Balancing payment	£2,000
New payment on account	£3,000
Total due January	£5,000

His January payment jumps from £2,000 to £5,000 because his income rose.

How to Reduce Payments on Account

If you know your income will be lower next year, you can apply to reduce your payments on account.

When to reduce:

Your self-employed income has dropped significantly
You've stopped freelancing or reduced your hours
You have new allowable expenses that will reduce taxable income
You've made pension contributions that will reduce tax

How to reduce:

Log into your HMRC online account
Go to Self Assessment
Select "Reduce payments on account"
Enter your estimated lower income
Submit the request

HMRC will adjust your payments based on your estimate.

Warning: If you reduce too much and your actual income is higher, you'll face a large balancing payment plus interest on underpaid amounts. Only reduce if you're confident your income will be lower.

The Payment Schedule

Here's how a typical year looks once you're in the system:

Date	What you pay
31 January	Balancing payment for previous year + First payment on account for current year
31 July	Second payment on account for current year

Both deadlines are fixed. Missing them triggers penalties and interest.

Example annual cycle for 2024/25 tax year:

Date	Payment
31 January 2025	Any remaining 2023/24 tax + 50% advance for 2024/25
31 July 2025	50% advance for 2024/25
31 January 2026	Any remaining 2024/25 tax + 50% advance for 2025/26

Budgeting for Payments on Account

The best way to avoid surprises is to save regularly throughout the year.

Rule of thumb: Set aside 25-30% of your self-employed profit each month. This covers:

Income Tax
National Insurance (Class 2 and Class 4)
Buffer for payments on account

Example: You earn £3,000 profit in a month. Set aside £750-£900 into a separate savings account. Don't touch it until tax time.

Some accounting apps can estimate your tax liability in real time and show how much you should be saving.

Common Questions

Can I pay monthly instead?

Yes, through a Budget Payment Plan. You set up a Direct Debit to make regular payments towards your tax bill. This doesn't reduce what you owe, but spreads the cost.

Set this up through your HMRC online account.

What if I can't afford the payments?

If you're struggling, you may qualify for a Time to Pay arrangement. This lets you spread payments over up to 12 months.

You can set this up online if:

You owe less than £30,000
Your return is filed
You're within 60 days of the payment deadline

Do payments on account include National Insurance?

Yes. Payments on account cover your total Self Assessment liability, which includes:

Income Tax
Class 4 National Insurance

Class 2 National Insurance is usually collected separately via Direct Debit.

What happens if I overpay?

If your actual tax bill is lower than your payments on account, HMRC will either:

Refund the difference, or
Credit it against your next payments

You can request a refund through your online account.

Can I increase payments on account?

Yes. If you know your income is rising, you can voluntarily pay more to avoid a large balancing payment. Make an additional payment through your HMRC account.

Practical Example: A Full Year

Let's follow Emma through a complete tax year.

Starting position: Emma's 2022/23 tax was £5,000.

January 2024:

Pays £2,500 (first payment on account for 2023/24)
Plus any balancing payment from 2022/23

July 2024:

Pays £2,500 (second payment on account for 2023/24)

Emma files her 2023/24 return in December 2024. Her actual tax liability is £6,200.

Calculation	Amount
2023/24 tax owed	£6,200
Already paid	£5,000
Balancing payment	£1,200
New payment on account (50% of £6,200)	£3,100

January 2025:

Pays £1,200 balancing payment
Pays £3,100 first payment on account for 2024/25
Total: £4,300

July 2025:

Pays £3,100 second payment on account

And the cycle continues.

Key Takeaways

Payments on account are advances — They're not extra tax, just early collection
Based on previous year — If income varies, balancing payments adjust
You can reduce them — But only if you're confident income will be lower
Budget monthly — Set aside 25-30% of profit to avoid surprises
Two deadlines — 31 January and 31 July, every year

Understanding payments on account removes the mystery from your tax bill. The system is predictable once you know how it works — and proper budgeting means no more January shocks.

This guide is for informational purposes only and does not constitute tax, legal, or financial advice. Tax rules change frequently. Always verify current requirements on GOV.UK or consult a qualified accountant for your specific situation.

Official Sources

Understand your Self Assessment tax bill - GOV.UK
Pay your Self Assessment tax bill - GOV.UK
Reduce your payments on account - GOV.UK
Budget Payment Plan - GOV.UK