Payments on account are advance payments towards your next year's tax bill that HMRC requires from Self-Assessment filers. They catch many self-employed workers, landlords, and freelancers off guard — particularly in the first year of Self-Assessment, when you owe the full previous year's bill plus half of next year's estimated bill on the same date. Understanding how they work and planning for them from day one can prevent a serious cash flow crisis.[1]
What are payments on account and when do they apply?
Payments on account are two advance payments that HMRC estimates you will owe in the following tax year. They apply when your Self-Assessment tax bill exceeds £1,000 after deducting any tax already collected at source (e.g., through PAYE on employment income). Each payment on account is 50% of your previous year's Self-Assessment liability — HMRC assumes your income will be similar this year and collects accordingly.
The logic is straightforward: if your tax bill last year was £4,000, HMRC assumes you will owe roughly the same this year and collects £2,000 in advance on 31 January and another £2,000 on 31 July. If your actual bill for the year turns out to be higher, you pay the balance on 31 January the following year. If it is lower, you receive a refund or reduced payments going forward.
You are exempt from payments on account if your Self-Assessment bill is£1,000 or less, or if more than 80% of your total tax liability was collected at source through PAYE. This means employees with a small amount of self-employed income alongside their salary may not need to make payments on account if PAYE covers most of their tax.
How are the two instalments calculated?
Each payment on account is exactly 50% of your previous year's Self-Assessment liability. This includes income tax, Class 4 NI (at 6% for 26-27), and student loan repayments — but not Class 2 NI (which is collected separately as a lump sum). The calculation excludes any Capital Gains Tax, which is not subject to payments on account.
The first payment is due on 31 January — the same date as your tax return and balancing payment for the previous year. The second is due on 31 July. For example, for the 26-27 tax year:
- 31 January 2028: balance of 26-27 tax + first payment on account for 2027/28
- 31 July 2028: second payment on account for 2027/28
This pattern repeats annually. The January date is particularly punishing because you are paying off last year's remaining balance AND starting to prepay next year's tax simultaneously. For a self-employed person with a £6,000 annual tax bill, January 2028 could require: £3,000 balancing payment + £3,000 first payment on account = £6,000 in one hit.
Why is the first year of Self-Assessment so expensive?
In your first year of Self-Assessment, there are no payments on account from the previous year to credit against your bill. This means you pay the entire first year's tax on 31 January, plus the first payment on account for year two — effectively 150% of a normal year's tax in a single payment. This is the “payment shock” that catches most new self-employed workers off guard.
Example: you become self-employed in April 2026 and earn £40,000 profit in your first year. After the Personal Allowance of £12,579, your income tax is approximately £5,484, plus Class 4 NI of approximately £1,646. Total bill: roughly £7,130. On 31 January 2028, you would owe this full amount PLUS 50% of it as a payment on account for 2027/28. The total January payment is approximately £10,695.
The lesson: from the day you start earning self-employed income, set aside 25-30% of profit into a separate savings account for tax. Do not wait until January to think about it. By the time you file your return, you need the cash ready. For a deeper look at gig worker tax planning, see our gig economy tax guide.
How can I reduce my payments on account?
If you expect your income to be lower than the previous year, you can apply to reduce your payments on account through your HMRC online account (or by writing to HMRC). This is useful if you have had an unusually high-income year (perhaps due to a one-off project or bonus) and know your normal income will be lower. You can reduce payments on account at any time before the due date.[2]
However, be cautious: if you reduce too much and your actual tax bill turns out to be higher than the payments you made, HMRC charges interest on the underpaid amount. The interest runs from when the payment was originally due, not from when you filed your return. Only reduce payments on account if you are genuinely confident your income will be lower — not as a cash flow convenience.
You can also reduce payments on account to zero if you know you will have no Self-Assessment liability (for example, if you have stopped self-employment and returned to full PAYE work). In this case, select “reduce to nil” in your HMRC account and you will not need to make any advance payments.
What happens if I miss a payment on account?
Late payments attract interest from the day after the due date. The interest rate is set by HMRC and currently sits at approximately 7.5% per annum (Bank of England base rate + 2.5%). There are no fixed penalties for late payments on account specifically, but persistent non-payment can trigger HMRC enforcement action including surcharges, Time to Pay arrangements, or county court judgments.
If you are struggling to pay, contact HMRC before the due date to arrange a Time to Pay plan. HMRC is generally willing to allow instalments over 6-12 months if you engage proactively. Ignoring payment deadlines is the worst strategy — interest accumulates and HMRC becomes less cooperative about flexible arrangements.
How do I check my payments on account balance?
Log in to your HMRC Personal Tax Account or Business Tax Account online. Your “Self-Assessment” section shows your payment schedule including upcoming payments on account, their amounts, and due dates. After you file your return, the system updates to show any balancing payment or refund alongside the new payments on account for the following year.
To estimate your payments on account before filing, use our income tax calculator to calculate your approximate tax bill for the year. If the result exceeds £1,000after any PAYE already collected, divide it by two to get each payment on account amount. For self-employed income, also add Class 4 NI at 6% on profits above £12,570.
For more on filing your tax return for the first time, see our first-time Self-Assessment guide.
Sources
- HMRC — Payments on account. Required when bill exceeds £1,000; each instalment is 50% of previous year's liability. Accessed July 2026.
- HMRC — Reduce your payments on account. How to apply to reduce payments if income drops. Accessed July 2026.
- HMRC — Income Tax rates and Personal Allowances. Personal Allowance £12,579, basic rate 20%, higher rate 40%. Accessed July 2026.