What Are Payments on Account? UK Tax Explained
A Self Assessment bill can feel far bigger than expected when it includes payments on account. The question, what are payments on account?, matters because these advance payments often catch out sole traders, landlords, CIS subcontractors and anyone whose tax is not fully dealt with through PAYE.
They are not an extra tax charge or a penalty from HMRC. They are advance instalments towards the following tax year's Income Tax and Class 4 National Insurance bill. Once you understand the timing, the figure becomes much easier to plan for.
What are payments on account?
Payments on account are HMRC's way of collecting some of next year's tax before the year has finished. They are based on your previous Self Assessment tax bill and are usually split into two equal payments.
The first payment is due by 31 January, alongside any balancing payment owed for the tax year you have just filed. The second is due by 31 July. Both payments are then set against your eventual tax bill for that following year.
For example, when you submit your 2025/26 Self Assessment return by 31 January 2027, HMRC may ask you to make payments on account towards your 2026/27 tax bill. This can be a surprise because you may be paying tax for the previous year and an advance payment towards the new one at the same time.
The key point is that the money is not paid twice. It is simply collected earlier. When your 2026/27 return is completed, HMRC will deduct the payments you have already made from the total due.
Who has to make payments on account?
HMRC normally requires payments on account when both of the following apply:
Your previous Self Assessment tax bill was more than £1,000.
Less than 80% of that tax was collected at source, such as through PAYE.
This commonly affects self-employed people, including taxi drivers and tradespeople, as well as landlords receiving rental income. It can also apply to company directors who receive dividends or have other untaxed income.
CIS subcontractors should pay particular attention. Tax deductions made by contractors are credited against your Self Assessment bill, but they do not always cover everything owed once profits, other income and National Insurance have been calculated. Depending on your final position, you may receive a CIS tax refund or be asked to make payments on account for the next year.
If you have a job where most tax is paid through PAYE but also run a small side business, the 80% rule may mean payments on account do not apply. It depends on how much of your overall tax has already been collected through your payslip.
Limited companies are different. A company's Corporation Tax is separate from your personal Self Assessment tax, and Corporation Tax payment rules follow their own timetable. However, a director may still need to make personal payments on account for tax due on dividends, property income or other income outside PAYE.
How HMRC calculates the instalments
Each payment on account is usually 50% of your previous year's Income Tax and Class 4 National Insurance liability. Capital Gains Tax is not included in the calculation, nor are student loan repayments.
Imagine your final Income Tax and Class 4 National Insurance bill for a year is £6,000. HMRC will generally set two payments on account of £3,000 each for the following year:
£3,000 due by 31 January
£3,000 due by 31 July
Now suppose you had already made two payments on account totalling £4,000 towards the £6,000 bill you have just calculated. You would owe a £2,000 balancing payment by 31 January. On the same date, you would also pay the first £3,000 instalment towards the next year. That makes the January payment £5,000.
This January combination is why people often describe their first payments-on-account year as a shock. The total may be correct, but it needs cash-flow planning well before the return deadline.
When the final bill is higher or lower
Your payments on account are only estimates based on the previous year. If your profits rise, the two instalments may not cover the whole bill. You will then pay a balancing payment by 31 January after the end of the tax year.
For instance, if your next year's actual tax bill is £7,500 but you have already paid £6,000 on account, you will owe the remaining £1,500 when you submit your return. HMRC will then use the £7,500 liability to calculate the next set of payments on account.
If your income falls, the reverse can happen. Say you paid £6,000 on account but your actual final bill is £4,500. The £1,500 overpayment can be refunded or set against another tax liability. That is helpful, but leaving too much cash with HMRC may not be ideal when you need funds for materials, vehicle costs, rent or payroll.
Can you reduce payments on account?
Yes, but only where there is a genuine reason to expect your tax bill to be lower. You can ask HMRC to reduce payments on account through your online tax account, via your Self Assessment return or by submitting form SA303.
A reduction may be reasonable if you have stopped trading, reduced your working days, sold a rental property, expect lower profits, or have taken on employment where more tax will be deducted through PAYE. It may also apply after a one-off profitable year, such as a landlord receiving a large amount of arrears or a contractor completing an unusually valuable project.
Do not reduce a payment simply because the bill is inconvenient. If the final tax due is higher than the reduced amount, HMRC can charge interest from the original payment due date on the shortfall. A sensible estimate, backed by up-to-date records, protects you from creating a bigger problem later.
For many clients, the best approach is to review year-to-date income and expenses before the January deadline. Waiting until the return is due can leave little room to make a proper decision.
How to budget for payments on account
The practical challenge is not the calculation. It is having the money available at the right time. If you are self-employed, treat tax as a regular business cost rather than something to deal with once a year.
Put aside a percentage of each payment you receive in a separate savings account. The right percentage depends on your profits, other income, allowable expenses and whether you are registered for VAT, but consistency matters more than guessing. A subcontractor with CIS deductions should still save towards a possible balance, rather than assuming deductions will settle everything.
Keep bookkeeping current as well. If your records are months behind, you cannot see whether you are earning more than last year or whether your payments on account are likely to be too high. Accurate records also help identify legitimate expenses, from mileage and tools to accountancy costs and business insurance, where they apply to your work.
It is also worth checking your payment dates against quieter periods in your trade. January can be difficult after Christmas, while July may land during holiday season or alongside VAT and payroll commitments. Building a tax reserve gradually reduces the pressure on both dates.
Common misunderstandings to avoid
A frequent misunderstanding is that payments on account cover every part of your tax bill. They generally cover Income Tax and Class 4 National Insurance only. Capital Gains Tax, student loan repayments and certain other amounts may still be due as part of the January balancing payment.
Another is that the second payment is optional because no tax return is filed in July. It is still due, and late payment interest can apply if it is missed.
Finally, a first payment on account does not mean HMRC believes you have done anything wrong. It usually means your income has reached the point where paying tax in arrears is no longer the normal arrangement.
A tax bill should never be allowed to become a last-minute surprise. If your income has changed, your records are unclear or a January figure does not look right, getting it checked early can turn a stressful demand into a manageable payment plan.
