Payments on Account Explained for the Self-Employed

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 — known as payments on account.

Understanding how payments on account work can help you plan ahead and avoid surprises. If your income comes from renting out property, our guide to payments on account for landlords covers the rental-income side.

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 2024/25 tax bill was £4,000. For the 2025/26 tax year, HMRC asks for:

Payment	Due date	Amount
First payment	31 January 2026	£2,000
Second payment	31 July 2026	£2,000
Balancing payment	31 January 2027	Depends on your 2025/26 return

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

Payments on account cover your Income Tax and Class 4 National Insurance. They don't include Class 2 National Insurance, Capital Gains Tax or student loan repayments — any amounts due for those are settled through your balancing payment on 31 January instead.

How to Calculate Payments on Account

Each payment on account is half of last year's Self Assessment bill, after any tax already deducted at source:

1. Take the Income Tax and Class 4 National Insurance from last year's tax return.
2. Subtract any tax already deducted at source, such as PAYE on a job or pension.
3. Check the result is £1,000 or more, and that no more than 80% of your total tax was collected at source — otherwise no payments on account are due.
4. Divide the result by two. That is the amount due on 31 January and again on 31 July.

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 the tax you owed last year was collected at source — for example, through PAYE on employment income
• You're still in your first year of self-employment — there's no earlier Self Assessment bill to base them on, so the first payment on account falls due alongside your first balancing payment (see below)

Example (2025/26): James earns £40,000 in employment (taxed via PAYE) and £3,000 profit from freelancing. His Self Assessment bill is £600 (20% basic rate Income Tax on £3,000; no Class 4 National Insurance, because his profit is below the £12,570 Lower Profits Limit). Since it's under £1,000, no payments on account are required.

The First-Year Bill: Why You Pay 150%

Your first January bill as a self-employed person can be 150% of your annual tax — the full year's tax plus the first payment on account for the next year. The biggest surprise often comes at the end of your first full year of self-employment.

Scenario: Sarah started freelancing in April 2025. In January 2027, she files her 2025/26 tax return showing a £6,000 tax liability.

She owes:

Payment	Amount
2025/26 tax bill	£6,000
First payment on account	£3,000
Total due 31 January 2027	£9,000

Sarah expected to pay £6,000, but she owes £9,000 — 150% of her tax bill. 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 feel like a lot.

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 2026/27 tax liability is £5,500.

Payments made	Amount
First payment (Jan 27)	£3,000
Second payment (Jul 27)	£3,000
Total paid	£6,000

Since she only owes £5,500, she's paid £500 too much. In January 2028, she'll receive:

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

Her new payments on account for 2027/28 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 2024/25 tax bill was £4,000, so he paid £2,000 on 31 January 2026 and £2,000 on 31 July 2026 towards 2025/26. But his 2025/26 income increased, and his actual 2025/26 tax bill is £6,000.

Calculation	Amount
2025/26 tax owed	£6,000
Already paid	£4,000
Balancing payment	£2,000
First payment on account for 2026/27 (50%)	£3,000
Total due 31 January 2027	£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:

1. Sign in to your HMRC online account
2. Go to your latest Self Assessment return
3. Select the option to reduce payments on account
4. Choose the reason and enter the reduced amount you expect to owe
5. Submit the request

HMRC will adjust your payments based on your estimate. You can also apply by post by sending form SA303 to HMRC if you'd rather not use the online service.

For a step-by-step walk-through of the SA303 process and worked examples, see our guide on how to reduce your payments on account.

Warning: If you reduce too much and your actual bill turns out higher, you'll face a larger balancing payment plus interest on the difference from the original due dates. HMRC can also charge a penalty if a reduction was made carelessly or deliberately. It's worth reducing only if you're confident your income will be lower.

The Payment Schedule: 31 January and 31 July

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. A late payment on account is charged interest; a late balancing payment is charged interest plus late-payment penalties — see what happens if you miss a Self Assessment deadline.

Example annual cycle for the 2026/27 tax year:

Date	Payment
31 January 2027	Any remaining 2025/26 tax + 50% advance for 2026/27
31 July 2027	50% advance for 2026/27
31 January 2028	Any remaining 2026/27 tax + 50% advance for 2027/28

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 4)
• Buffer for payments on account

Example: You earn £3,000 profit in a month. Set aside £750-£900 into a separate savings account. Many self-employed people find it helpful to leave this pot untouched until tax time.

Some accounting apps can estimate your tax liability in real time and show how much you should be saving. For a month-by-month savings plan, see how to budget for your self-employed tax bill.

Practical Example: A Full Year

Let's follow Emma through a complete tax year.

Starting position: Emma's 2024/25 tax was £5,000.

31 January 2026:

• Pays £2,500 (first payment on account for 2025/26)
• Plus any balancing payment from 2024/25

31 July 2026:

• Pays £2,500 (second payment on account for 2025/26)

Emma files her 2025/26 return in December 2026. Her actual 2025/26 tax liability is £6,200.

Calculation	Amount
2025/26 tax owed	£6,200
Already paid	£5,000
Balancing payment	£1,200
New payment on account (50% of £6,200)	£3,100

31 January 2027:

• Pays £1,200 balancing payment for 2025/26
• Pays £3,100 first payment on account for 2026/27
• Total: £4,300

31 July 2027:

• Pays £3,100 second payment on account for 2026/27

And the cycle continues.

Key Takeaways

1. Payments on account are advances — They're not extra tax, just early collection
2. Based on previous year — If income varies, balancing payments adjust
3. You can reduce them — But only if you're confident income will be lower
4. Budget monthly — Set aside 25-30% of profit to avoid surprises
5. 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.

Frequently Asked Questions

Can I pay monthly instead of in two lump sums?

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, which lets you pay what you owe in monthly instalments. You can usually set one up online if you owe £30,000 or less and have filed your tax return; HMRC checks the plan is affordable based on your income and spending. If you owe more, or need longer to pay, you can call the Self Assessment Payment Helpline. Interest still applies to the unpaid amount while the plan runs. See if you cannot pay your tax bill on time on GOV.UK.

Do payments on account include National Insurance?

Yes — Class 4 National Insurance. Payments on account are based on your Income Tax and Class 4 National Insurance, but not Class 2 National Insurance, Capital Gains Tax or student loan repayments. From April 2024, most self-employed people no longer pay Class 2 National Insurance directly — it is treated as paid automatically if your profits are above the Small Profits Threshold (£6,845 for 2025/26).

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 voluntarily?

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.

Are payments on account extra tax on top of what I owe?

No. They're advance payments towards next year's tax bill, not additional tax. Once your actual tax is calculated, any overpayment is refunded or credited to your account.

Can I reduce my payments on account?

Yes, through your HMRC online account. If you expect your income to be lower next year, you can apply to reduce them. Be careful — if you reduce too much, you'll face interest on the underpaid amount.

Why is my first Self Assessment bill so much higher than expected?

In your first year, you pay the current year's tax plus the first payment on account for next year — typically 150% of your annual tax bill. This evens out from year two onwards.

What happens if I miss the 31 July payment?

Payments on account don't attract the late-payment penalties that apply to an unpaid balancing payment (for 2025/26, 5% of the tax unpaid at 30 days, 6 months and 12 months after 31 January 2027). Instead, HMRC charges interest on the amount you owe from the due date until you pay it. The late-payment interest rate is 7.75% from 9 January 2026 (Bank of England base rate plus 4%) — check the current rate on GOV.UK, as it moves with Bank Rate. Setting up a Direct Debit or calendar reminder helps avoid this.

If you join Making Tax Digital for Income Tax from 6 April 2026, a new points-based late-submission and late-payment penalty regime applies from the 2026/27 tax year onwards. It doesn't change how payments on account for 2025/26 work.

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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
• HMRC interest rates for late and early payments - GOV.UK
• Self Assessment penalties - GOV.UK
• If you cannot pay your tax bill on time - GOV.UK