Payment on Account Explained: HMRC Self Assessment Guide 2026

If you've just completed your first profitable year as a UK sole trader or freelancer, you might have received a nasty surprise on your Self Assessment tax bill: payments on account. Instead of owing tax once a year, HMRC now expects you to pay twice in advance for the following tax year — on top of any balance you owe for the current year.

What are payments on account?

Payments on account are advance payments towards your next year's tax bill. Think of them as HMRC's way of collecting tax throughout the year instead of waiting until January.

If you owe over £1,000 in Self Assessment tax in any given year, HMRC will usually require you to make two payments on account for the following year:

1. First payment: 31 January (same day as your Self Assessment deadline)
2. Second payment: 31 July

Each payment is 50% of your previous year's tax bill.

Example

Let's say you complete your 2024/25 Self Assessment in January 2026 and owe £6,000 in tax.

Here's what you'll actually pay:

• 31 January 2026: £6,000 (balance for 2024/25) + £3,000 (first payment on account for 2025/26) = £9,000 total
• 31 July 2026: £3,000 (second payment on account for 2025/26)

You've now paid £12,000 total: £6,000 for the previous year and £6,000 in advance for the current year.

When you file your 2025/26 return in January 2027, HMRC will calculate your actual tax bill. If you owe more than the £6,000 you've already paid, you'll pay the difference. If you've overpaid, you'll get a refund.

Who needs to make payments on account?

You'll need to make payments on account if:

• Your Self Assessment tax bill is over £1,000, AND
• Less than 80% of your tax was already deducted at source (e.g., via PAYE)

Most sole traders, freelancers, and landlords meet this threshold once they're earning a decent income.

Who's exempt?

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

• Your tax bill is under £1,000
• More than 80% of your tax was deducted via PAYE (e.g., you have a full-time job and small side income)
• This is your first year filing Self Assessment

The cashflow trap

The first year of payments on account is brutal for cashflow.

You finish your tax return expecting to pay, say, £5,000. But instead, HMRC asks for £7,500 (£5,000 for last year + £2,500 first payment on account).

Six months later, you owe another £2,500 (second payment on account).

By the time you've filed your second year's return, you've paid £15,000 in tax across 15 months — even though your actual tax bill was only £10,000 total. The extra £5,000 was just paying in advance for the following year.

If you don't plan for this, it can wipe out your cash reserves.

What if your income has dropped?

Here's the good news: you can reduce your payments on account if you know your income will be lower in the current tax year.

How to reduce payments on account

When you file your Self Assessment online, there's a section where you can claim to reduce your payments on account.

You'll need to:

1. Estimate your income and expenses for the current tax year
2. Calculate what you think your tax bill will be
3. Request a reduction to match your new estimate

HMRC will accept your reduction without questioning it upfront. However, if you underestimate, you'll owe interest on the shortfall when you file your next return.

Only reduce your payments if you're genuinely confident your income has dropped. Don't use it as a cashflow trick.

Example: reducing payments

You earned £60,000 in 2024/25 and owed £10,000 in tax. HMRC wants £5,000 payments on account (£5k in Jan, £5k in July) for 2025/26.

But you know your income for 2025/26 will only be £40,000, meaning your tax bill will be around £6,000.

You can reduce your payments on account to:

• First payment: £3,000 (50% of estimated £6,000)
• Second payment: £3,000

When you file in January 2027, if your actual bill was £6,500, you'll owe the £500 difference plus a small amount of interest. But if your actual bill was £6,000, you're all paid up.

Common mistakes to avoid

1. Not budgeting for the double payment in January

The first January after you start making payments on account, you'll pay roughly 1.5x your expected tax bill (100% for last year + 50% for next year).

Set aside cash throughout the year. Don't wait until January to realize you can't pay.

2. Reducing payments on account to improve cashflow

Some people reduce their payments on account just to keep more cash in their business, even though their income hasn't actually dropped.

Bad idea. You'll owe the full amount in January plus interest. HMRC charges interest at around 7-8% currently. That's more expensive than most business overdrafts.

3. Forgetting the July deadline

Most people remember the 31 January deadline. The 31 July second payment on account is easier to forget, especially since there's no tax return due that month.

Miss it and you'll be charged interest and potentially a penalty.

4. Not adjusting payments when income genuinely drops

On the flip side, if your income has dropped (e.g., you took time off, lost a client, switched to part-time), don't overpay out of fear.

Use the reduction system. It's there for exactly this reason.

Payments on account vs. Making Tax Digital

From April 2026, if you're a sole trader earning over £50,000, you'll need to comply with Making Tax Digital for Income Tax (MTD), which requires quarterly updates to HMRC.

Important: MTD does not change the payment on account system. You'll still pay tax on 31 January and 31 July. MTD only changes how you report income and expenses (quarterly summaries instead of one annual return).

Don't confuse the two. Quarterly reporting ≠ quarterly payments.

How to manage payments on account

Here's a simple system to avoid cashflow pain:

1. Open a separate tax savings account

Every time you get paid, transfer 25-30% into a tax savings account. This covers:

• Income tax
• National Insurance
• Payments on account

When January comes, you'll have the cash ready.

2. Set calendar reminders

Add these to your calendar:

• 31 January: Self Assessment deadline + first payment on account
• 31 July: Second payment on account
• 5 April: End of tax year (good time to estimate next year's bill)

3. Review your income quarterly

Every three months, check:

• Is my income higher or lower than last year?
• Will I need to reduce my payments on account?
• Do I have enough saved for the next payment?

Catching problems early gives you time to adjust.

4. Use software to track payments

A good bookkeeping tool (or even a spreadsheet) should show:

• How much you've earned this year
• How much tax you owe so far
• Whether you're on track vs. last year

If you're using Notion, our UK Self Assessment & MTD Tracker includes a payment on account calculator and deadline tracker built specifically for UK sole traders.

What happens if you can't pay?

If you genuinely can't afford your payment on account, contact HMRC immediately. Don't just ignore it.

You can:

• Set up a Time to Pay arrangement (payment plan)
• Reduce your second payment on account if you know your income has dropped
• Claim a refund if you've genuinely overpaid

HMRC is surprisingly flexible if you communicate early. They're much less flexible if you miss deadlines without warning.

Penalties for late payment

• Interest: Charged daily on any unpaid tax (currently around 7.75%)
• 5% penalty: If payment is over 30 days late
• Another 5%: If payment is over 6 months late
• Another 5%: If payment is over 12 months late

These penalties stack, so a payment that's 13 months late will have 15% in penalties plus interest.

Key deadlines reminder

Date	What's due
31 January	Self Assessment return + balance + first payment on account
31 July	Second payment on account
5 April	End of tax year

Summary

Payments on account are advance payments towards next year's tax bill.

• You pay two instalments (31 Jan and 31 July)
• Each is 50% of last year's tax bill
• You can reduce them if your income drops
• You'll owe interest if you underestimate

The first year is the hardest because you're paying for two years at once. After that, it's just part of the rhythm.

Pro tip: Save 25-30% of every payment you receive. By January, you'll have more than enough.

Related Articles

• Making Tax Digital for Income Tax Guide
• Self Assessment Expenses for Sole Traders
• UK VAT Registration Threshold Guide
• UK Landlord Allowable Expenses