Payment on Account Explained: Why HMRC Asks for Tax in Advance
📋 Quick Summary
- Payment on account = advance payment towards next year's tax
- Two payments per year: 31 January and 31 July
- Each payment = 50% of your previous year's tax bill
- Threshold – Only required if tax bill was £1,000+ AND less than 80% collected at source
- Can be reduced if your income is expected to drop
If you've filed a self-assessment tax return and suddenly found yourself owing much more than expected, you've probably encountered payments on account. It's one of the most confusing aspects of self-assessment for many people.
This guide explains what payments on account are, how they're calculated, and what you can do if they're causing cash flow problems.
What is a Payment on Account?
A payment on account is an advance payment towards your next year's tax bill. HMRC assumes your income will be similar each year, so they ask you to pay some of next year's tax in advance.
Think of it as HMRC's way of spreading your tax payments throughout the year, rather than having one big bill every January.
💡 Simple Explanation
When you pay your 2024/25 tax bill in January 2026, HMRC also asks for 50% of that amount as an advance on your 2025/26 tax bill. Then in July 2026, they ask for another 50%. When your 2025/26 bill is calculated, these payments are deducted from what you owe.
How Payments on Account Work
The system works on a rolling basis with three types of payment:
| Payment | Due Date | What It Covers |
|---|---|---|
| 1st Payment on Account | 31 January | 50% advance towards current year's tax |
| 2nd Payment on Account | 31 July | Another 50% advance towards current year's tax |
| Balancing Payment | 31 January (following year) | Any remaining tax owed after deducting payments on account |
Example: How It's Calculated
Let's walk through a real example to make this clearer:
📊 Example: Sarah the Freelancer
2024/25 Tax Year:
- Sarah's self-assessment tax bill = £6,000
- Due by 31 January 2026
What Sarah Actually Pays on 31 January 2026:
| Tax owed for 2024/25 | £6,000 |
| 1st Payment on Account for 2025/26 (50% of £6,000) | £3,000 |
| Total Due 31 January 2026 | £9,000 |
31 July 2026:
- 2nd Payment on Account = £3,000
Total Paid in Advance for 2025/26: £6,000 (£3,000 + £3,000)
When Sarah files her 2025/26 tax return, the £6,000 she's already paid will be deducted from whatever she owes. If her actual tax bill is higher, she pays a "balancing payment". If it's lower, she gets a refund or credit.
Why the First Year Is a Shock
The payment on account system catches many people off guard, especially in their first year of self-employment or becoming a landlord.
⚠️ First Year Warning
In your first year, you pay 150% of your tax bill – your actual tax plus 50% advance for next year. If your tax bill is £4,000, you'll owe £6,000 in January. This catches many new sole traders and landlords by surprise!
After the first year, the system evens out – you're effectively paying last year's tax with this year's advances. But that initial year can be a significant cash flow hit.
Do You Need to Make Payments on Account?
Not everyone needs to make payments on account. You DON'T need to pay if:
✅ Tax Bill Under £1,000
If your self-assessment tax bill is less than £1,000, you don't need to make payments on account.
✅ 80%+ Collected at Source
If 80% or more of your tax was already deducted through PAYE (from employment), no payments on account are needed.
Example: If you're employed (PAYE) but have a small amount of rental income, and the tax on your rental income is under £1,000, you won't need to make payments on account.
How to Reduce Your Payments on Account
If your income has dropped significantly, you can apply to reduce your payments on account. This is useful if:
- Your business income has fallen
- You've stopped being self-employed
- You've sold a rental property
- You've taken on more employed work (taxed through PAYE)
How to Apply to Reduce Payments
- Online: Log into your HMRC online account → Self Assessment → Reduce payments on account
- Paper: Complete form SA303 and send to HMRC
- Phone: Call the Self Assessment helpline on 0300 200 3310
- Through your accountant: We can submit the request on your behalf
⚠️ Warning: Don't Reduce Too Much
If you reduce your payments on account but your actual tax bill ends up being higher, HMRC will charge interest on the underpaid amount. Only reduce payments if you're confident your income will be lower.
HMRC Budget Payment Plan
If you'd rather spread payments throughout the year, HMRC offers a Budget Payment Plan. Instead of two big payments, you can set up a direct debit to pay a regular amount each week or month.
Budget Payment Plan Benefits
- Pay weekly or monthly – you choose
- Easier cash flow management
- No interest charges if you pay enough
- Builds up credit with HMRC
- Reduces January/July payment shock
You can set up a Budget Payment Plan through your HMRC online account. It's a great option for freelancers and contractors who want predictable monthly outgoings.
What Happens If You Don't Pay?
Missing payment on account deadlines has consequences:
| Consequence | Details |
|---|---|
| Interest | HMRC charges interest on late payments (currently around 7.5%) |
| Late Payment Penalty | 5% penalty if 30+ days late, additional penalties at 6 and 12 months |
| Debt Collection | HMRC may use debt collection agencies for unpaid tax |
| Credit Rating | Serious non-payment can affect your credit score |
If you're struggling to pay, contact HMRC before the deadline. They can often arrange a Time to Pay arrangement to spread the debt over several months.
Tips for Managing Payments on Account
✅ Smart Payment Strategies
- Save 25-30% of income – Set aside money for tax throughout the year
- Use a separate tax savings account – Don't mix tax money with business funds
- File your return early – Know what you owe well before January
- Consider a Budget Payment Plan – Spread payments monthly
- Review payments on account – Reduce them if income has dropped
- Mark key dates – 31 January and 31 July should be in your diary
Frequently Asked Questions
Can I pay my payment on account early?
Yes! You can pay your payments on account any time before the deadline. Some people prefer to pay as soon as they have the money, so it's not sitting in their account tempting them to spend it.
What if I overpay through payments on account?
If your payments on account exceed your actual tax bill, HMRC will refund the difference or credit it against future tax. You can request a refund through your HMRC online account.
Do payments on account include Class 2 National Insurance?
No. Payments on account only cover Income Tax and Class 4 National Insurance. Class 2 NI is paid separately as part of your balancing payment in January.
I'm employed AND self-employed – how does this work?
Payments on account are only calculated on the tax not collected through PAYE. So if most of your income is from employment, your payments on account will be smaller (based only on the self-employment tax).
What's the difference between payment on account and balancing payment?
Payments on account are advance payments based on ESTIMATED tax (using last year's figures). The balancing payment is the final amount due once your ACTUAL tax is calculated – it settles the difference between what you paid in advance and what you actually owe.
Key Dates to Remember
📅 Your Tax Payment Calendar
| 31 January | Balancing payment for previous year + 1st payment on account for current year |
| 31 July | 2nd payment on account for current year |
| 31 January (next year) | Cycle repeats – balancing payment + new 1st payment on account |
Need Help with Your Tax Payments?
Confused by payments on account? We can calculate what you owe, help you reduce payments if appropriate, and make sure you never miss a deadline.
Sardar Muhammad, AAT
Sardar is the founder of LimeTree Accounting Solutions, an AAT-accredited practice based in Glasgow. He helps sole traders, landlords, and small businesses manage their tax obligations and avoid surprises at payment time.