You’ve filed your Self Assessment return, you’ve seen your tax bill, and then you notice an extra line at the bottom — something called “payment on account” that’s due on 31 July. It looks like HMRC is asking you to pay next year’s tax before you’ve even earned it. That’s exactly what they’re doing, and it catches almost every new self-employed person off guard.
This guide explains what Payment on Account is, how HMRC calculates it, when you have to pay it, and what to do if your income changes. For a worked example showing payments on account on a completed return, see our Self Assessment tax return example. If you’re already in a panic because you can’t pay the 31 July instalment, see our action guide on what to do if you can’t pay your payment on account.
What Is Payment on Account?
Payment on Account is HMRC’s system for collecting tax in advance from people who don’t pay through PAYE — primarily self-employed people and landlords. Instead of waiting until the end of the year and demanding one large lump sum, HMRC asks you to pay toward next year’s bill in two instalments. According to HMRC’s guidance on payments on account, the system exists because self-employed income is uneven and HMRC wants to avoid a situation where you face a single huge bill once a year.
The key thing to understand is that payments on account are not an extra tax. They’re an advance toward the tax you’ll owe for the current tax year. Think of them as a rolling deposit — you’re paying this year’s tax in instalments, based on what you owed last year.
Here’s how the cycle works in practice:
- Year 1 — you file your return for the 2024-25 tax year and owe £4,000. You pay that £4,000 by 31 January 2026 (the “balancing payment”).
- Same 31 January — because your bill was over £1,000, HMRC also asks for the first Payment on Account toward 2025-26: £2,000 (50% of last year’s bill). So your total January payment is £6,000.
- 31 July 2026 — you pay the second Payment on Account: another £2,000.
- 31 January 2027 — you file your 2025-26 return. You’ve already paid £4,000 on account. If your actual bill is £4,500, you pay a balancing payment of £500. If it’s £3,500, you get a £500 refund.
The cycle then repeats, with the 2026-27 payments on account based on your 2025-26 bill.
How Payments on Account Are Calculated
Each Payment on Account is 50% of your previous year’s total tax bill — meaning your Income Tax plus Class 4 National Insurance contributions combined. According to HMRC’s Self Assessment billing guidance, the calculation uses the tax due on your last return, not your current income.
A worked example:
- Your 2024-25 Self Assessment shows £3,200 Income Tax and £800 Class 4 NI = £4,000 total tax
- First Payment on Account (31 January 2026): £4,000 ÷ 2 = £2,000
- Second Payment on Account (31 July 2026): £2,000
- Total paid on account toward 2025-26: £4,000
When you file your 2025-26 return, HMRC compares what you actually owe against the £4,000 you’ve already paid:
- Owe more than £4,000 → you pay the difference as a “balancing payment” by 31 January 2027, plus your first Payment on Account for 2026-27 (50% of the new, higher bill)
- Owe less than £4,000 → HMRC refunds the difference, or applies it to your next Payment on Account
- Owe exactly £4,000 → nothing more to pay in January, just the next Payment on Account instalment
This is why a profitable year can produce a shockingly large January bill: you’re paying the balancing payment for the year just ended plus the first instalment toward next year, all on the same day.
When Do You Make Payments on Account?
You have to make Payments on Account if both of these are true, per HMRC’s guidance:
- Your last Self Assessment tax bill was more than £1,000
- Less than 80% of your tax was collected at source (e.g. through PAYE on employment income or pension)
The 80% rule exists to protect people who are mostly PAYE but have a small amount of self-employed income. If you’re a full-time employee doing a bit of freelance work and your PAYE already covers most of your tax, you won’t be asked for payments on account — you’ll just pay the balancing payment each January.
The two payment dates are fixed:
| Payment | Due date | What it covers |
|---|---|---|
| Balancing payment + first Payment on Account | 31 January | Settles last year’s bill; first instalment toward this year |
| Second Payment on Account | 31 July | Second instalment toward this year |
If a deadline falls on a weekend or bank holiday, you must pay by the last working day before it — HMRC does not extend the deadline. You can pay online via HMRC’s payment portal by debit card, bank transfer (Faster Payments), or CHAPS. Allow at least 3 working days for bank transfers to clear.
When You Don’t Have to Make Payments on Account
You won’t be asked for Payments on Account if any of these apply:
- Your last tax bill was £1,000 or less — you just pay the balancing payment each January
- More than 80% of your tax was collected at source — e.g. you’re a PAYE employee with a small side income, and your employer’s tax deductions already cover most of what you owe
- This is your first year of Self Assessment — there’s no previous bill to base the payments on, so you just pay one lump sum by 31 January. The payments on account system kicks in from the second year onwards. This is why the first January feels manageable and the second one feels brutal — you’re suddenly paying 1.5x your tax bill (balancing payment + first payment on account) instead of 1x.
The first-year trap is the most common cause of January panic. If you’d like the full picture of how Self Assessment fits together for new sole traders, see our first-year self-employed checklist.
What Happens If You Overpay or Underpay
Because Payments on Account are estimates based on last year, they rarely match what you actually owe. The reconciliation happens when you file your next return.
If you overpaid (your actual bill is lower than the payments you made):
- HMRC will either refund the difference automatically, or
- Apply it as a credit toward your next Payment on Account
You can choose to take the refund or leave it as a credit — most people take the refund, but if you expect next year’s bill to be higher, leaving it reduces your next January payment.
If you underpaid (your actual bill is higher than the payments you made):
- You pay the difference as a balancing payment by the next 31 January
- You’ll also face a larger Payment on Account for the following year, since it’s now based on the higher bill
This is the “good year, bad January” problem: a year where your profit jumps means your next January payment combines the balancing payment for that higher profit plus a bigger first Payment on Account. Budgeting for 1.5x your expected tax in January is a sensible rule of thumb.
How to Reduce Your Payments on Account
If you expect your income to be lower this year than last year, you don’t have to pay the full Payment on Account — you can ask HMRC to reduce it. According to HMRC’s guidance on reducing payments on account, there are two ways to do this:
Option 1: Online through your HMRC account
- Log into your HMRC Online account
- Go to the Self Assessment section
- Select “Reduce payments on account”
- Enter the new amounts you want to pay
- Submit — HMRC updates your payment schedule immediately
Option 2: Form SA303 You can download and post form SA303 to HMRC. This is the paper route, useful if you can’t access your online account or prefer a paper trail.
The catch: interest on underpayments
Reducing your Payments on Account is a claim about the future — you’re saying “I expect to earn less this year.” If you’re wrong, and your actual bill turns out to be higher than the reduced payments you made, HMRC charges interest on the underpayment from the original due dates (31 January and 31 July), not from when you file your return. The current late payment interest rate is 7.25% (as of early 2025 — check HMRC’s current rate).
So the rule is: only reduce your payments on account if you have a genuine reason to believe your income will drop — lost a major client, wound down a trade, retired, took a PAYE job. Don’t reduce them just to improve cash flow if your income is stable, because the interest will wipe out the benefit.
For the full step-by-step on reducing payments when you can’t pay, see our action guide on what to do if you can’t pay your payment on account.
How Payments on Account Work Under Making Tax Digital
A common worry is that Making Tax Digital changes the payment system. It doesn’t. According to HMRC’s MTD guidance, MTD changes how you report income (quarterly digital updates instead of one annual return), not how you pay. The two payment dates — 31 January and 31 July — stay exactly the same.
What does change under MTD is that after each quarterly update, your software or HMRC online account will show an estimated tax bill based on your year-to-date figures. This is informational only — it does not trigger a payment. The estimate can help you budget: if your quarterly figures show profit rising, you can set more aside in advance of the 31 January and 31 July dates. If profit is falling, you can reduce your payments on account proactively rather than waiting until January.
For the full MTD roadmap, see our Making Tax Digital guide. For how the payment cycle sits alongside the quarterly reporting cycle, see MTD for income tax explained.
The Bottom Line
- Payment on Account is not extra tax — it’s an advance toward this year’s bill, paid in two instalments (31 January and 31 July).
- Each instalment is 50% of last year’s tax bill (Income Tax plus Class 4 NI combined).
- You have to make payments on account if your last bill was over £1,000 and less than 80% of your tax was collected at source.
- The first January after you start is manageable; the second is brutal — you’re paying 1.5x your tax bill (balancing payment + first payment on account) on the same day.
- You can reduce your payments on account if your income has genuinely dropped, via HMRC online or form SA303 — but if you’re wrong, HMRC charges interest from the original due dates.
- MTD doesn’t change the payment system — the 31 January and 31 July dates stay the same; only the reporting cycle changes.
For the full list of Self Assessment deadlines, penalties, and payment options, see our Self Assessment deadlines and payment hub.
If you can’t pay your 31 July payment on account, see our action guide on what to do if you can’t pay your payment on account. For the full rundown of options when you can’t afford your tax bill — Time to Pay, debt priorities, and what HMRC can do if you don’t engage — see our can’t afford your tax bill guide. For the full Self Assessment penalty regime (late filing, late payment, interest), see our Self Assessment penalties guide. For ways to reduce your tax bill in the first place — expenses, allowances, pensions, Gift Aid — see our reduce your Self Assessment tax bill hub. If you’d rather hand your tax return to a professional, compare accountants and filing services in our Self Assessment help section.