Payments on Account Explained: What They Are and How to Reduce Them

/Published:16th April 2026/inFreelancers, Self Employed, Sole Trader, Tax
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If you completed a Self Assessment tax return last year and your bill came to more than £1,000, there is a good chance His Majesty’s Revenue and Customs (HMRC) asked you to make two additional payments on top of what you already owed. For many self-employed people, sole traders, and limited company directors receiving dividends, these payments on account come as an unwelcome surprise – particularly if no one has explained the system clearly.

This guide covers exactly how payments on account work, when they are due, what happens if your income changes, and how you can legally apply to reduce them if your circumstances have shifted. If you would like tailored advice on your own position, our team at Accounting Wise is always happy to help.

What Are Payments on Account?

Payments on account are advance payments towards your next Self Assessment tax bill. HMRC uses them to collect Income Tax and Class 4 National Insurance contributions throughout the year, rather than waiting for you to pay everything in one lump sum the following January.

The system is designed to keep tax collection closer to the period in which income is earned. In practice, it means that once your annual tax bill exceeds a certain threshold, you will be required to pay some of your next year’s tax before you even know what that bill will be.

Payments on account do not cover Capital Gains Tax or student loan repayments. Those are settled separately through your balancing payment.

Who Has to Make Payments on Account?

You are required to make payments on account if both of the following conditions apply:

  • Your Self Assessment tax bill for the previous year was more than £1,000.
  • Less than 80% of your tax was collected at source (for example, through PAYE on an employment salary).

This catches a wide range of people, including:

  • Sole traders and freelancers with self-employment income
  • Limited company directors paying themselves through dividends
  • Landlords with rental income above the personal allowance
  • Higher earners with investment income or untaxed interest
  • Partners in business partnerships

If your tax bill falls below £1,000, or if most of your tax is collected through PAYE, payments on account do not apply to you. If you are unsure whether you need to file a Self Assessment return at all, HMRC’s online checker tool can help you confirm your status.

How Are Payments on Account Calculated?

Each payment on account is set at 50% of your previous year’s tax bill. HMRC takes your most recent Self Assessment liability and splits it into two equal instalments. The calculation covers Income Tax and Class 4 National Insurance contributions only – it does not include Capital Gains Tax, student loan repayments, or (for those it still applies to) Class 2 National Insurance.

A Practical Example

Suppose your 2024 to 2025 Self Assessment tax bill came to £8,000. HMRC will require you to make two payments on account towards your 2025 to 2026 tax year, each of £4,000, totalling £8,000 in advance.

When you file your 2025 to 2026 return and your actual tax liability is calculated, one of three things will happen:

  • Your bill is higher than anticipated: You pay the difference as a balancing payment.
  • Your bill matches the payments on account: Nothing further is owed.
  • Your bill is lower than anticipated: HMRC will owe you a refund.

When Are Payments on Account Due?

There are two payment deadlines each year:

  • 31 January (during the tax year) – first payment on account
  • 31 July (after the tax year ends) – second payment on account

The January deadline often catches people off guard because it falls at the same time as the balancing payment for the previous tax year. This means that in January, some taxpayers are paying three amounts at once: the balancing payment for one year, the first payment on account for the next, and potentially interest if anything was late.

The July deadline is the one that tends to feel most frustrating. By that point, the January bill is recent memory, and many taxpayers feel they are paying tax on income they have not yet received.

You can view your current payments on account at any time by logging into your HMRC online Self Assessment account and navigating to your statements.

The January Cash Flow Problem

Consider a self-employed consultant who had a strong year in 2023 to 2024 and owed £12,000 in tax. By 31 January 2025, she had to pay:

  • £12,000 balancing payment for 2023 to 2024
  • £6,000 first payment on account for 2024 to 2025

A total of £18,000 due in a single month. If her 2024 to 2025 income has been lower, those payments on account may well be overstated – but she still has to pay them unless she applies to reduce them.

This kind of cash flow pressure is one of the most common issues our clients raise with us. Our sole trader accountancy service includes proactive tax planning to help you avoid these last-minute surprises.

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Can You Reduce Your Payments on Account?

Yes. If you believe your tax liability for the current year will be lower than the previous year, you can apply to HMRC to reduce your payments on account. This is known as a “claim to reduce” and can be made either through your Self Assessment tax return or directly via your HMRC online account.

The process is straightforward:

  1. Log in to your HMRC online Self Assessment account.
  2. Navigate to your payments on account section.
  3. Enter your revised estimated tax liability for the year.
  4. Submit the claim. HMRC will adjust the amounts accordingly.

You can also make the claim through your accountant, or by submitting form SA303 by post, though the online route is faster. HMRC actively encourages taxpayers to file their return early if they expect their income to have fallen – doing so confirms the reduced liability and may also trigger a repayment sooner if you have overpaid.

Valid Reasons to Apply for a Reduction

You should only apply to reduce if there is a genuine reason your income or tax position has changed. Common legitimate reasons include:

  • Lower self-employment profit than the previous year
  • Reduced dividend income from your limited company
  • A period of illness, maternity leave, or business wind-down
  • Additional allowable expenses or pension contributions reducing your liability
  • Increased PAYE income meaning more tax is collected at source
  • A change in your personal circumstances affecting your tax-free allowances

A Word of Caution on Reducing Payments

If you reduce your payments on account and your actual tax bill turns out to be higher than you estimated, HMRC will charge interest on the underpayment. This interest runs from the original due dates – not from when your return is filed. As of 9 January 2026, HMRC’s late payment interest rate stands at 7.75% per year, calculated as the Bank of England base rate plus 4%. That premium above base rate was increased from 2.5% to 4% on 6 April 2025, making late or underpaid amounts significantly more expensive than they were in previous years. The current rate is available on the GOV.UK interest rates page and will change whenever the Bank of England adjusts the base rate.

Deliberately and repeatedly understating your tax liability to reduce payments on account without good reason could attract scrutiny from HMRC. Always base any reduction claim on a realistic view of your actual income and expenses for the year.

Payments on Account and Limited Company Directors

Many limited company directors structure their remuneration as a low salary topped up with dividends. If dividend income has pushed your personal tax bill above £1,000 in the past, you will almost certainly be subject to payments on account.

Directors have a useful degree of control here. Because dividends are paid at the discretion of the company, you may be able to time payments to influence your tax position in a given year – though this requires careful planning alongside your accountant to avoid unintended consequences.

For example, if a director decides to take lower dividends in the 2025 to 2026 tax year because the company needs to retain cash, this would reduce their personal Income Tax liability and justify a reduced payment on account for that year.

It is worth noting that corporation tax, VAT, and employer National Insurance are all separate obligations that sit outside the personal Self Assessment system. Payments on account relate solely to personal Income Tax and Class 4 National Insurance. For more on how director remuneration affects your overall tax position, take a look at our guide to dividend tax for limited company directors.

Payments on Account and Making Tax Digital

From 6 April 2026, Making Tax Digital for Income Tax (MTD for ITSA) became mandatory for sole traders and landlords with qualifying gross income above £50,000. Under MTD, income and expenses are reported quarterly to HMRC rather than annually. Payments on account remain unchanged under this new regime – the 31 January and 31 July deadlines apply as before.

One useful point to note: under the new MTD penalty framework, late payment penalties do not apply to payments on account themselves, though late payment interest continues to accrue if they are paid after the deadline. The balancing payment and final declaration continue to carry the full penalty structure. If you are in the first year of MTD compliance (2026 to 2027), HMRC has confirmed there will be no penalty points for late quarterly updates during this transitional period – though penalties for late tax and late payment remain in force.

MTD is being extended to those with qualifying income above £30,000 from April 2027. If you are unsure whether MTD applies to you, the HMRC MTD sign-up guidance sets out the eligibility criteria in detail. We can help you assess your position and choose the right compatible software – find out more about our Making Tax Digital support service.

Practical Tips for Managing Payments on Account

  • Set aside tax as you earn. A common rule of thumb for self-employed individuals is to reserve 25 to 30% of income for tax as it comes in. This softens the impact of January and July deadlines significantly.
  • File your return early. The sooner you file, the sooner you know your actual liability. If your income has fallen, an early return confirms any refund due and allows you to reduce future payments on account with confidence.
  • Review your position before 31 July. Before the second payment on account falls due, consider whether your income for the year is tracking higher or lower than last year. If lower, make a reduction claim before the deadline.
  • Consider a Budget Payment Plan. HMRC offers a Budget Payment Plan allowing you to make regular weekly or monthly payments towards your next tax bill throughout the year. It is separate from a Time to Pay arrangement and can be set up, paused, or adjusted at any time through your HMRC online account.
  • Maximise pension contributions. Contributions to a registered pension scheme reduce your adjusted net income, potentially bringing your bill below the payments on account threshold or reducing the base on which future payments are calculated.
  • Use a dedicated savings account for tax. Holding tax reserves in a separate account reduces the temptation to spend funds earmarked for HMRC and makes your cash flow position clearer at a glance.

What Happens If You Miss a Payment on Account Deadline?

Missing a payment on account does not immediately trigger a fixed penalty in the way that a late tax return does. However, HMRC will charge interest from the date the payment was due. At 7.75% per year, interest accumulates daily and adds meaningfully to the total owed over time.

If a late payment remains unpaid for more than 30 days, HMRC can apply a penalty of 5% of the unpaid amount. Further penalties of 5% each apply at six months and twelve months if the debt remains outstanding. HMRC also has the power to pursue formal enforcement action, including debt collection and, in serious cases, county court judgments.

It is always better to contact HMRC directly if you are struggling to pay. In many cases, a Time to Pay arrangement can be agreed, spreading the debt over a period of months. If a Time to Pay arrangement is confirmed before a penalty is triggered, the late payment penalty will not apply – though interest continues to accrue throughout the arrangement.

Payments on Account vs Balancing Payment: Key Differences

It is worth being clear on the distinction between the two:

  • Payments on account are advance payments made during the year, based on last year’s bill. They are due on 31 January and 31 July.
  • The balancing payment is the difference between what you have already paid on account and what your actual tax bill turns out to be. It is due by 31 January following the end of the tax year.

If your payments on account exceed your actual liability, the overpayment is treated as a credit and can be offset against future payments or repaid to you. Full official guidance is available on the GOV.UK Self Assessment payments on account page.

Final Thoughts on Payments on Account

Payments on account are one of the most misunderstood aspects of Self Assessment, and they cause genuine stress for thousands of self-employed people and directors every January and July. The system is not designed to be punitive – it is simply HMRC’s way of collecting tax closer to the time it is earned. But without proper planning, it can create serious cash flow pressure.

The key takeaways are these: understand how your liability is calculated, set money aside throughout the year, review your position before each deadline, and do not hesitate to apply for a reduction if your income has genuinely fallen. With HMRC’s late payment interest rate now at 7.75% per year – one of the highest levels in over a decade – the cost of leaving payments unpaid has risen sharply, and acting early is more important than ever.

At Accounting Wise, we help sole traders, freelancers, landlords, and limited company directors stay on top of their Self Assessment obligations throughout the year – not just at filing time. If you would like support with your payments on account, your tax return, or your broader tax planning, get in touch with our team today.

For official HMRC guidance on payments on account, visit the GOV.UK Self Assessment payments on account page.

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What are Payments on Account FAQ

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Yes. Payments on account cover both Income Tax and Class 4 National Insurance contributions for self-employed individuals. Capital Gains Tax and student loan repayments are excluded from payments on account and settled separately through the balancing payment. Class 2 National Insurance was abolished for most self-employed people from April 2024 and is no longer a factor for the majority of taxpayers.

In your first year, there are no prior year figures for HMRC to base payments on account on. You will pay your tax bill in full as a balancing payment by 31 January following the end of the tax year. If that bill exceeds £1,000, HMRC will add the first set of payments on account at the same time — which means your first January bill can be up to 150% of what you might have been expecting. Planning ahead in your first year of Self Assessment is essential.

Yes, if you reasonably expect your tax liability for the year to be nil or very low, you can apply to reduce your payments on account to zero. This would apply if you have stopped trading, have no taxable income above the personal allowance, or if all your income is now collected through PAYE.

Once you have filed a Self Assessment return with a liability above the threshold, HMRC’s systems will calculate your payments on account automatically. You can view the amounts and due dates in your HMRC online account at any time. HMRC may also send correspondence by post or secure digital message.

Significantly so, particularly in the first year the system applies to you. Working with an accountant to forecast your tax position well in advance of both the January and July deadlines makes a real difference. Our Self Assessment service includes year-round tax planning as standard, so you always know what is coming and when.

Glossary of Payment on Accounts Terms

Payments on Account – Advance payments made towards your next Self Assessment tax bill, each equal to 50% of your previous year's liability. Due on 31 January and 31 July each year.
Balancing Payment – The final amount owed (or refunded) once your actual tax liability for the year is calculated. Due by 31 January following the end of the tax year.
Self Assessment – The system HMRC uses to collect Income Tax from individuals whose tax is not fully deducted at source, including sole traders, landlords, and company directors.
Class 4 National Insurance – A National Insurance contribution paid by self-employed individuals on their profits. Included in payments on account calculations alongside Income Tax.
Claim to Reduce – A formal request to HMRC to lower your payments on account because you expect your tax liability for the current year to be less than the previous year.
SA303 – The HMRC form used to apply to reduce your payments on account by post, as an alternative to making the claim online through your Self Assessment account.
Utilisation Rate – HMRC's term for the proportion of your tax collected at source (e.g. through PAYE). If less than 80% is collected at source, payments on account will apply.
Adjusted Net Income – Your total income minus certain deductions such as pension contributions and Gift Aid. Reducing this figure can lower your Self Assessment liability and therefore your payments on account.
Time to Pay (TTP) – A formal arrangement with HMRC allowing you to spread an overdue tax debt over monthly instalments. If agreed before a penalty is triggered, late payment penalties do not apply, though interest continues to accrue.
Budget Payment Plan – An HMRC facility allowing you to make voluntary regular payments throughout the year towards your next tax bill, helping spread the cost ahead of the January and July deadlines.
Late Payment Interest – Interest charged by HMRC on unpaid tax from the original due date. Currently set at 7.75% per year (Bank of England base rate plus 4% as of January 2026).
MTD for ITSA (Making Tax Digital for Income Tax Self Assessment) – The HMRC initiative requiring sole traders and landlords with qualifying income above £50,000 to keep digital records and submit quarterly income updates from April 2026.
Qualifying Income – For MTD purposes, the combined gross income from self-employment and property before expenses. Used to determine whether and when you must join Making Tax Digital.
HMRC – His Majesty's Revenue and Customs, the UK government body responsible for collecting taxes and administering the Self Assessment system.
UTR (Unique Taxpayer Reference) – A 10-digit number assigned by HMRC when you register for Self Assessment. Required for all correspondence, payments, and form submissions.

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