Payments on Account Explained for the Self-Employed
Payments on account are the part of Self Assessment that catches most new sole traders off guard. They are advance payments toward next year's tax bill, and in your second year of trading they can make your January payment look far bigger than you expected. This guide explains how they work, when they are due and what you can do if your profits fall. It is general information, not tax advice, so check GOV.UK or an accountant for your own situation.
Key takeaways
- Payments on account are two advance instalments toward your next tax bill, each normally half of last year's bill, including Class 4 National Insurance.
- They are due on 31 January and 31 July, alongside the usual Self Assessment deadlines.
- You do not have to make them if last year's bill was under £1,000 or more than 80% of your tax was already paid at source.
- Your first January after a profitable year can include last year's full bill plus half of it again, so plan for that jump.
- If you expect lower profits, you can apply to reduce your payments on account, but you pay interest if you reduce them too far.
When you work for an employer, tax comes out of every payslip through PAYE. As a sole trader, nobody takes tax from your income as you earn it. HMRC deals with this gap through payments on account: rather than waiting until after the tax year has ended to collect everything, it asks you to pay part of the bill in advance, based on what you owed last time.
The system is logical once you see it laid out, but the timing feels strange at first because you are paying for two different tax years on the same day. Let us walk through it step by step.
What payments on account are
A payment on account is an advance payment toward your tax bill for the current tax year. The UK tax year runs from 6 April to 5 April, so the current tax year is 6 April 2026 to 5 April 2027. You normally make two payments on account for each tax year:
- The first payment is due on 31 January during the tax year.
- The second payment is due on 31 July just after the tax year ends.
Each payment is normally half of your previous year's Self Assessment bill. That bill includes your Income Tax and any Class 4 National Insurance on your profits. Once you file your return for the year and HMRC knows the real figure, any difference is settled through a balancing payment on the following 31 January.
What is not included
Some amounts sit outside payments on account. Student loan repayments and Capital Gains Tax are paid with the balancing payment on 31 January, not through payments on account. So if you repay a student loan through Self Assessment, your payments on account will not cover it, and you should budget for it separately.
Who has to make them
Payments on account apply to most people who pay tax through Self Assessment and had a meaningful bill last year. There are two main exceptions. You do not have to make payments on account if:
- Your last Self Assessment bill was under £1,000. Small bills are simply paid in one go by 31 January.
- More than 80% of your tax was paid at source. For example, if most of your income comes from a job taxed through PAYE and your freelance side income is small, you may fall below the line.
Your Self Assessment statement or your HMRC online account shows whether payments on account have been set, and for how much. If you use software or an accountant, the figures will usually appear in your tax calculation once your return is filed.
Pro tip
Log in to your HMRC online account after filing your return and look at the "what you owe" section. It shows the balancing payment and both payments on account with their dates, so you can put the exact amounts in your calendar rather than guessing.
How the timeline works in practice
The confusing part is that a single 31 January payment can cover two tax years at once. On that date you typically pay the balancing payment for the tax year that ended the previous April, plus the first payment on account for the tax year you are currently in. The table below shows how the dates line up for the 2026/27 tax year.
| Date | What you pay | Tax year it relates to |
|---|---|---|
| 31 January 2027 | Balancing payment for the previous year | 2025/26 |
| 31 January 2027 | First payment on account | 2026/27 |
| 31 July 2027 | Second payment on account | 2026/27 |
| 31 January 2028 | Balancing payment, plus first payment on account for the next year | 2026/27 and 2027/28 |
Your online return for 2026/27 is also due by 31 January 2028. That return tells HMRC your actual profit, which sets the balancing payment and the payments on account for the following year.
The second-year shock, worked through
Payments on account usually start after your first full year with a tax bill of £1,000 or more. Because the first payment on account falls on the same day as your first balancing payment, the first January can be a big one.
Example
Imagine a freelance designer who starts trading in the 2025/26 tax year and has made-up figures for illustration only. When she files her return, her bill for 2025/26 (Income Tax plus Class 4 National Insurance) comes to £6,000. She has made no payments on account yet, because she had no previous bill.
On 31 January 2027 she pays the £6,000 balancing payment for 2025/26, plus a first payment on account for 2026/27 of £3,000 (half of £6,000). That is £9,000 on one day. On 31 July 2027 she pays the second payment on account of another £3,000.
If her 2026/27 bill turns out to be £7,000, she has already paid £6,000 toward it, so the balancing payment on 31 January 2028 is £1,000, plus the first payment on account for 2027/28. This is simplified: it ignores other income, student loans and any other adjustments.
Once you are in the cycle, the payments become much more predictable. The jump only happens once, in that first January, and again in any year where your profits rise sharply, because the balancing payment catches up with the increase while the next payments on account are also set higher.
Common mistake
Saving exactly enough for last year's bill and nothing more. In your first January with payments on account, you need roughly 150% of last year's bill on hand. If you only saved 100%, you face a shortfall at the worst possible time of year.
Reducing your payments on account
Payments on account are based on last year's figures, which is fine when your income is steady but unfair if your profits drop. If you expect this year's bill to be lower than last year's, you can apply to reduce your payments on account. You can do this through your HMRC online account or with a form, and many accountants handle it as part of filing.
Common reasons to reduce include:
- You lost a major client or took time off, so profits will be lower.
- You stopped trading or moved to employment taxed through PAYE.
- You have higher allowable expenses this year, for example because you invested in equipment.
- More of your tax is now being collected at source.
Common mistake
Reducing payments on account to zero to ease cash flow when you do not genuinely expect a lower bill. If you reduce them and your actual bill turns out higher, HMRC charges interest on the difference that should have been paid. Only reduce to a figure you can honestly justify, and keep notes on how you worked it out.
What if you paid too much?
If your payments on account were more than your final bill, the overpayment can be refunded or used against your next bill. Your statement shows the credit after you file. Filing early helps here, because HMRC can only calculate the true position once it has your return.
How to plan your cash for payments on account
Payments on account are not an extra tax. They simply bring the timing of your tax forward. The real risk is cash flow, so build a routine that keeps the money ready before it is due.
- Open a separate tax savings account. Move a share of every payment you receive into it, so the money is never mixed with spending money.
- Use last year's bill as your baseline. Divide the expected 31 January and 31 July amounts by the months until each date to get a monthly saving target.
- Adjust when profits change. If business is growing, save more than your payments on account, because a balancing payment will follow.
- File early. Filing in the summer or autumn tells you the January figure months in advance, rather than in the last week of January.
- Pay by the deadline. Late payments attract interest and, for balancing payments, can lead to late payment penalties.
Pro tip
If you struggle to set aside a lump sum, look at HMRC's options for paying in advance through your online account. Paying small amounts toward your next bill throughout the year spreads the cost and makes January much calmer.
Payments on account and Making Tax Digital
If you are in Making Tax Digital for Income Tax, you send quarterly updates through compatible software. Those updates give you a running estimate of your tax, which makes planning easier, but your payment dates for Self Assessment still follow the familiar pattern. Check GOV.UK for the latest position, as the details are still evolving.
Your payments on account action plan
- Check your HMRC online account for the amounts and dates set for you
- Add 31 January and 31 July to your calendar with reminders a month before
- Open or review a separate savings account for tax
- In your first year of payments on account, budget for about 150% of last year's bill in January
- Budget separately for any student loan repayment, which is paid with the balancing payment
- If profits are falling, consider applying to reduce, with a figure you can justify
- File your return early so you know the January amount in good time
Frequently asked questions
Are payments on account an extra tax?
No. They are advance payments toward your tax bill for the current year. Over time you pay the same total tax; payments on account only change when you pay it. Any overpayment is refunded or credited, and any shortfall is collected through the balancing payment.
Do I make payments on account in my first year of trading?
Usually not, because they are based on the previous year's bill and you did not have one. They typically start in the January after your first year with a Self Assessment bill of £1,000 or more, which is why that January is often the largest payment.
Does Class 4 National Insurance count toward payments on account?
Yes. Your payments on account are based on your Income Tax and Class 4 National Insurance from Self Assessment. Student loan repayments and Capital Gains Tax are not included and are paid with the balancing payment.
Can I reduce payments on account after I have made one?
You can apply to reduce them during the year if your circumstances change. If you have already paid more than the reduced figure, the excess can be refunded or credited. Keep in mind that interest applies if the reduction turns out to be too large.
Related reading
The bottom line
Payments on account move part of your tax bill forward, so you pay as you go rather than all at once. The main trap is the first January, when last year's bill and half of next year's land on the same day. Save through the year, know your dates and only reduce payments on account when your profits genuinely drop.
Rates, thresholds and rules change from one tax year to the next. This is general information, not tax advice, so check the latest guidance from HMRC on GOV.UK or speak to an accountant before making decisions.
