Payments on account are one of the most common causes of financial shock for people new to self-employment in the UK. You file your Self Assessment, calculate that you owe £3,000 in tax — and then HMRC asks you for £4,500. That extra £1,500 is a payment on account for next year, collected in advance. And then you have to pay another £1,500 in July.
This guide explains exactly how payments on account work, how to reduce them if your income has fallen, and how to plan for them so they never catch you off guard again.
What Are Payments on Account?
Payments on account are advance payments toward your next year's tax bill. HMRC collects them in two instalments:
31 January — 50% of the previous year's tax bill, paid at the same time as the current year's tax
31 July — the other 50% of the previous year's tax bill
They apply when your Self Assessment tax bill for the year exceeds £1,000, and when less than 80% of your tax is collected at source (i.e. through PAYE).
Example:
Your 2024/25 Self Assessment tax bill was £4,000.
On 31 January 2026, you pay: £4,000 (for 2024/25) + £2,000 (first payment on account for 2025/26) = £6,000 total.
On 31 July 2026, you pay: £2,000 (second payment on account for 2025/26).
If your 2025/26 bill is then also £4,000, the two payments on account you have already made (£2,000 each) cover it exactly — and no balancing payment is due in January 2027. The system assumes your income stays roughly the same year to year.
If your income has increased, you will owe a balancing payment in January on top of the new payments on account. If your income has fallen, you have overpaid and will receive a refund — but only after you file the return.
Why Do They Cause Problems?
The January payment combines the balancing payment for the year just ended and the first payment on account for the current year. This creates the shock that catches new self-employed people off guard.
In your first year of Self Assessment, you pay the whole year's tax bill plus half of next year's in January. If you have not set money aside for this, it can feel impossible. In reality, the system is designed to keep you slightly ahead — but only if you budget for it correctly from the start.
How to Reduce Your Payments on Account
If your income has fallen significantly compared to the previous year — perhaps because of illness, a quiet period, losing a major client, or any other reason — you are entitled to reduce your payments on account to reflect your expected lower liability.
This is called a claim to reduce payments on account, and it is done through your HMRC Self Assessment account online.
To reduce your July 2026 payment on account:
Log into your HMRC Personal Tax Account at gov.uk. Go to Self Assessment, then Payments. Select Reduce my payments on account. Enter your estimated liability for 2025/26. HMRC recalculates the July payment based on this estimate.
This is one of the most effective cash flow actions available to self-employed people. If your July payment on account is set at £3,000 based on a strong prior year, but this year is much weaker, reducing it to £1,200 (your actual expected liability) keeps £1,800 in your business right now rather than sitting with HMRC for months.
Important warning: If you reduce your payments on account but your actual liability turns out to be higher than you estimated, HMRC will charge interest on the underpayment from the due dates. Always base your reduction on a realistic, careful estimate.
What If You Cannot Afford to Pay?
If your Self Assessment payment is due and you cannot pay in full, contact HMRC before the deadline — not after. HMRC's Time to Pay service allows you to set up a payment plan, typically spreading the bill over 6 to 12 months.
Calling before the deadline almost always results in a more accommodating arrangement than calling weeks later having already missed it.
Planning for Payments on Account — The Simple System
The simplest system for managing tax as a self-employed person: set aside 25% to 30% of every payment you receive into a separate savings account. Do not touch it. When January and July arrive, the money is already there.
Basic rate taxpayers typically owe 20% to 25% of profit in combined income tax and Class 4 NI. Higher rate taxpayers should set aside 40% to 45% on the portion of income above £50,270.
Keeping a dedicated tax savings account removes the psychological difficulty of finding a large sum in January and replaces it with the straightforward discipline of setting money aside throughout the year.
A Real-Life Example
Client A ran a freelance design business in Stanmore. In 2024/25, she had an excellent year earning £68,000. Her tax bill came to £17,200, including payments on account. In January 2026, she paid this in full.
In 2025/26, she had a quieter year — a major client left and her income dropped to approximately £38,000. Her July 2026 payment on account was set at £8,600 based on the prior year's liability.
She came to us in June 2026. We reviewed her 2025/26 position, estimated her actual liability at approximately £4,100, and helped her reduce her July payment on account to £2,050 (half the estimated liability). She kept £6,550 in her business rather than sending it to HMRC in July and waiting months for a refund.
When her 2025/26 return was eventually filed, her actual liability was £4,300. She paid the small £200 balancing amount in January 2027 with no issue.
Frequently Asked Questions
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