Few things catch new Self Assessment taxpayers off guard quite like their first January bill being far bigger than the tax they actually owed for the year. The culprit is usually payments on account — advance payments toward next year’s tax bill, added on top of what you owe for the year you’re actually filing. It’s not an extra charge or a penalty; it’s simply how HMRC spreads tax payments for people whose income isn’t taxed at source. Understanding how the system works makes it far easier to plan for.
Want help understanding or planning around your payments on account? Book a free 15-minute consultation with Felix Accountants. Book your free call here.
What Are Payments on Account?
Payments on account are advance instalments toward your next tax year’s Self Assessment bill. Rather than waiting until the following January to collect the full amount you’ll owe, HMRC asks most Self Assessment taxpayers to pay roughly half of their expected bill in January and the other half in July, based on the assumption that your income this year will be similar to last year’s.
Who Has to Pay Them?
You’ll generally need to make payments on account if both of the following apply:
- Your Self Assessment tax bill for the year was more than £1,000
- Less than 80% of the tax you owed was already collected at source, for example through PAYE
This means most landlords, sole traders and contractors with meaningful untaxed income will fall within the payments on account system, while someone with a small amount of side income taxed mostly through PAYE, or a modest one-off tax bill under £1,000, generally won’t.
How the Two Payments Are Calculated
Each payment on account is equal to 50% of your previous year’s Self Assessment tax bill. So if your tax bill for 2025/26 was £6,000, your payments on account toward 2026/27 would be £3,000 in January 2027 and £3,000 in July 2027 — in addition to any balancing payment due for 2025/26 itself.
A Worked Example
| Date | What’s Due | Example Amount | ||
|---|---|---|---|---|
| 31 January | Balancing payment for the previous tax year + first payment on account for the current year | £3,000 (balance) + £3,000 (1st POA) = £6,000 | ||
| 31 July | Second payment on account for the current year | £3,000 | ||
| Following 31 January | Balancing payment once the actual bill is known + first payment on account for the next year | Varies depending on actual profit | ||
This is why the first year of payments on account often feels disproportionately painful — you’re effectively paying for the previous year and a chunk of the current year at the same time.
What Counts Toward the Payments on Account Calculation
Payments on account are based on your Income Tax and Class 4 National Insurance liability. Capital Gains Tax and student loan repayments are excluded from the payments on account calculation and are instead collected in full as part of your balancing payment. This is a common point of confusion — a large one-off capital gain won’t inflate your payments on account for the following year, but it will need to be paid in full at the balancing payment stage.
Can You Reduce Your Payments on Account?
Yes. If you expect your income for the current year to be lower than the previous year — for example, if a rental property was sold partway through the year, or business income has genuinely dropped — you can apply to reduce your payments on account through your HMRC online account, or by submitting form SA303. This can meaningfully help with cash flow, but it’s worth being careful: if you reduce your payments too far and your actual tax bill turns out higher than the reduced amount, HMRC will charge interest on the shortfall from the original due date, even though you paid the reduced amount on time.
What Happens If You Miss a Payment on Account Deadline?
Interest starts accruing the day after the due date, calculated at the Bank of England base rate plus a fixed percentage. Unlike Self Assessment filing penalties, there’s typically no grace period before interest begins on unpaid tax. If a payment remains outstanding for an extended period, additional late payment penalties can also apply on top of the accruing interest.
How Payments on Account Interact With Making Tax Digital
With Making Tax Digital for Income Tax being introduced from April 2026 for those with qualifying income above £50,000, it’s worth being clear that MTD changes how income and expenses are reported to HMRC — through quarterly digital updates — but it does not change the payments on account system itself. The 31 January and 31 July payment dates remain the same; only the reporting process around them is changing.
Planning Ahead So January Doesn’t Catch You Out
The most effective way to avoid a payments-on-account shock is to set aside a consistent percentage of income throughout the year, rather than treating tax as a single annual event. Many landlords and sole traders find it helpful to transfer roughly a quarter to a third of income into a separate savings account as it’s received, so both the balancing payment and the next payment on account are already covered when the deadlines arrive. Our guide on understanding the UK tax year and key deadlines is a useful companion for mapping out the full annual calendar alongside your payments on account.
How Felix Accountants Can Help
We help landlords and small business owners understand exactly what they’ll owe and when, well before the deadline arrives, and can advise on whether reducing your payments on account makes sense for your circumstances. See our guide on how to file taxes as a landlord for how payments on account fit into the wider Self Assessment picture.
Frequently Asked Questions
Do I have to make payments on account in my first year of trading?
Yes, if your first year’s tax bill is over £1,000 and less than 80% was collected at source, you’ll be required to make payments on account toward the following year, which is why the first January bill can be a shock.
Are payments on account based on my exact current income?
No. They’re based on your previous year’s tax bill, split into two equal instalments, on the assumption your income will be similar. If it isn’t, you can apply to reduce them.
Does Capital Gains Tax affect my payments on account?
No. Capital Gains Tax is excluded from the payments on account calculation and is instead paid in full as part of your balancing payment.
What happens if I reduce my payments on account too much?
If your actual tax bill turns out higher than your reduced payments, HMRC will charge interest on the underpaid amount from the original due date, so reductions should be based on a realistic estimate.
Does Making Tax Digital change when I pay my tax?
No. MTD changes how income and expenses are reported to HMRC through quarterly digital updates, but the 31 January and 31 July payment on account deadlines remain unchanged.
Don’t get caught out by your next Self Assessment bill. Book your free 15-minute consultation with Felix Accountants.