What Are Payments on Account and Why Do I Have to Pay Them?
- Jul 10
- 5 min read
Many people receive their first Self Assessment tax bill and are surprised to see they owe more than expected.
You might have expected to pay £3,000 in tax but HMRC asks for £4,500 instead.
The extra amount isn't a mistake. It's called a payment on account, and it's one of the most common causes of confusion for sole traders, landlords, freelancers, and small business owners across the UK.
At DUO Accountants, we regularly help clients understand why these payments exist and whether they really need to make them. Here's everything you need to know in simple terms.
What Is a Payment on Account?
A payment on account is an advance payment towards your next year's Income Tax bill.
Instead of waiting until the end of the tax year to collect all your tax, HMRC asks some taxpayers to pay part of it in advance. Think of it as paying your tax little by little instead of all at once.
For people who continue earning similar amounts every year, this helps spread the cost.
Payments on account apply to:
Sole traders
Self-employed individuals
Freelancers
Landlords with rental income
Some partners in partnerships
Others who pay Income Tax through Self Assessment
They are based on your previous year's Income Tax and Class 4 National Insurance, but they do not include items like Capital Gains Tax or Student Loan repayments.
Why Does HMRC Ask for Payments on Account?
HMRC assumes that if you earned a certain amount this year, you may earn a similar amount next year. Rather than waiting until next January to collect all of next year's tax, they ask for part of it in advance. This means:
smaller tax payments spread across the year
fewer large tax bills
more regular cash flow for HMRC
Who Has to Pay Payments on Account?
You usually need to make payments on account if both of the following apply:
a. Your Self Assessment tax bill is more than £1,000, and
b. Less than 80% of your tax has already been collected through PAYE or other tax deducted at source.
You probably won't need to make payments on account if:
your tax bill is less than £1,000
most of your tax has already been deducted through PAYE
it's your first year with only a small amount of Self Assessment tax
HMRC automatically works this out after you submit your tax return.
How Are Payments on Account Calculated?
Each payment is usually 50% of your previous year's Income Tax and Class 4 National Insurance liability.
Example
Imagine your Income Tax and Class 4 National Insurance bill for 2025/26 is:
£4,000
HMRC will ask you to pay:
First payment on account: £2,000
Second payment on account: £2,000
Together, these make £4,000 towards your next tax year.
If your next year's actual tax bill turns out to be:
£4,000 — you've already paid it.
£5,000 — you'll pay the extra £1,000 as a balancing payment.
£3,000 — you've paid too much and the extra can usually be refunded or set against future tax.
When Are Payments on Account Due?
There are two payment dates every year.
Date | Payment Due |
31 January | Balancing payment for the previous tax year (if any) plus first payment on account |
31 July | Second payment on account |
This is why many taxpayers are shocked by the amount due on 31 January.
You're often paying:
last year's remaining tax and
half of next year's estimated tax at the same time.
Why Is My January Tax Bill So High?
Let's look at an example.
Your tax bill for 2025/26 is: £6,000
Because this is your first year paying payments on account, your January payment could be:
Tax bill for 2025/26: £6,000
First payment on account for 2026/27: £3,000
Total due on 31 January: £9,000
Then you'll pay another £3,000 on 31 July. Many people think HMRC has charged them twice, but that's not what's happening. The extra £6,000 is simply being paid early towards your next tax year.
What Happens If My Income Drops?
This is an important point.
Payments on account are only estimates. If you know your income will be lower than last year—for example:
you've reduced your working hours
your business has slowed down
you've sold your rental property
you've stopped trading
You may be able to apply to reduce your payments on account. Read how to reduce payments on account here.
However, be careful. If you reduce them too much and your final tax bill is actually higher, HMRC may charge interest on the amount you underpaid.
What Happens If I Don't Pay?
Missing a payment deadline can become expensive. If you don't pay on time, HMRC may charge late payment interest, add penalties if payments remain overdue and/or continue chasing the outstanding balance. If you're struggling to pay, don't ignore the bill.
HMRC may allow you to arrange a Time to Pay agreement, letting you spread the cost over monthly instalments if you're eligible.
Can I Pay Early?
Yes. Many business owners prefer to pay gradually throughout the year rather than facing one large bill in January.
HMRC allows eligible taxpayers to make regular weekly or monthly payments towards their next Self Assessment bill through a Budget Payment Plan. Planning ahead often makes tax payments much less stressful.
Frequently Asked Questions
Are payments on account an extra tax?
No. They're simply advance payments towards your next tax bill.
Will I always have to pay payments on account?
Not necessarily. If your future tax bill falls below the qualifying threshold or most of your tax is collected through PAYE, HMRC may stop requiring them.
What if I earn more than expected?
If your actual tax bill is higher than your payments on account, you'll pay the difference as a balancing payment by the following 31 January.
What if I overpay?
Any overpayment is usually refunded or credited against future tax liabilities once your tax return has been processed.
Final Thoughts
Payments on account can seem confusing at first, but they're simply HMRC's way of collecting tax in advance. The key things to remember are:
They're not an extra tax.
They apply only in certain circumstances.
They are usually based on your previous year's Income Tax and Class 4 National Insurance.
They're due on 31 January and 31 July.
If your income falls, you may be able to reduce them, but only if it's justified.
Understanding how they work can help you avoid unexpected bills, manage your cash flow more effectively, and stay on top of your tax obligations.
If you're unsure whether your payments on account are correct or want help planning for your next tax bill, DUO Accountants is here to help with clear, friendly advice tailored to your circumstances.
RELATED ARTICLES:
