Few things catch self-employed people off guard quite like payments on account. You file your tax return, brace yourself for the bill, pay it, and then discover HMRC also expects you to pay a chunk of next year’s tax at the same time. It feels like being charged twice, and it is genuinely confusing the first time around.

Payments on account explained simply: they are advance payments towards your next tax bill, collected by HMRC twice a year rather than in one lump at the end. The system exists because HMRC would rather collect tax throughout the year than wait until the following January. Once you understand the mechanics, it becomes much easier to plan for, and in some cases you can legitimately reduce what you owe upfront.

Here is how the system works, who it applies to, and what your options are if your income has fallen since last year.

A payment on account is an advance payment towards your income tax and Class 4 National Insurance bill for the current tax year. HMRC calculates each payment as half of what you owed in the previous tax year, and you pay two of them: the first by 31 January and the second by 31 July.

So if your 2024/25 self-assessment bill came to £3,000, HMRC expects you to pay £1,500 by 31 January 2026 (alongside settling the 2024/25 balance) and another £1,500 by 31 July 2026. Those two payments together represent your advance contribution towards the 2025/26 tax year.

When you complete your 2025/26 return the following January, HMRC calculates your actual liability for that year and subtracts the payments you have already made. If you have paid enough, you get a refund or carry a credit forward. If your actual bill was higher than anticipated, you pay the difference as a balancing payment, again by 31 January.

The key thing to understand is that your first year of self-assessment can produce a bill that feels much larger than expected, because you are paying last year’s tax and the first instalment of next year’s tax at the same time. We see this catch a lot of newly self-employed clients out, and it is worth budgeting for from the moment you start trading.

Payments on account are not universal. HMRC only requires them if your previous year’s self-assessment tax bill was £1,000 or more, and less than 80% of your total tax liability was collected at source (for example through PAYE on employment income).

This means:

• If your self-assessment bill was under £1,000 last year, you are not required to make payments on account.
• If you have significant PAYE income alongside your self-employed income and PAYE is covering most of your tax, you may also be exempt.
• If you have only just started out and your first return produces a bill under £1,000, you will simply pay that balance and nothing more at that point.

Most full-time sole traders and freelancers earning a reasonable income will be in scope. IT contractors, consultants, and others who earn mainly through self-employment rather than PAYE are typically making payments on account every year.

One thing that does catch people out: if your income grows significantly, your payments on account also increase, because they are based on the prior year’s liability. A year of strong earnings in 2025/26 will feed into larger advance payments due in January and July 2027. Keeping a rough tax reserve throughout the year is the most reliable way to avoid a cash-flow shock.

Payments on account cover income tax and Class 4 National Insurance contributions. That is it. Two taxes that are commonly confused with others, so it is worth being clear about what falls outside the system.

Capital gains tax is not included in payments on account. If you sold a property or asset in the tax year and owe CGT, that amount is collected separately as part of your balancing payment in January, not spread across the two advance instalments. The same applies to student loan repayments: they are excluded from payments on account and collected through the balancing payment instead.

This matters for planning. If you have had a year with significant capital gains, your payments on account will not reflect that at all, because they are based purely on income tax and Class 4 NI from the prior year. You need to set aside funds for the CGT separately.

One more thing worth knowing: the two payments on account cannot together exceed the full amount of income tax and Class 4 NI assessed for the preceding year. HMRC caps each payment at 50% of that figure, so the system is, at least in theory, self-limiting. In practice, the issue is usually not overpaying in advance but underpaying, which brings us to the next section.

If you expect this year’s income to be lower than last year, you do not have to pay advance payments based on a higher prior-year bill. HMRC allows you to apply to reduce your payments on account, provided you have a genuine reason to believe your liability will be lower.

There are two ways to do this. The simpler route is through your HMRC online account: log in, go to your self-assessment section, and select the option to reduce payments on account. You can also submit form SA303 by post if you prefer.

When applying, you give HMRC your best estimate of what you expect to owe for the year. The important caveat is accuracy. If you reduce your payments on account and your actual tax bill turns out to be higher than you estimated, HMRC will charge interest on the difference. The interest runs from the original payment deadline, not from when you file your return, so an overly optimistic estimate can prove costly.

We would generally advise reducing payments only when there is a clear, supportable reason: you have taken on less work, a client has ended a contract, you have had a period of illness, or your business has genuinely contracted. Reducing them on the basis of hope rather than evidence tends to create problems in January. If you are unsure, talk it through with an accountant before applying. A rough projection of the year’s income will usually give you enough information to make a sensible call.

Missing a payment on account deadline carries real consequences. HMRC charges interest from the day after the deadline on any amount unpaid. For the January payment, that is from 1 February; for the July payment, from 1 August. Interest accumulates daily until the amount is paid in full.

On top of interest, late payment of the overall self-assessment bill (including any balancing payment) can attract penalties of 5% of the unpaid tax at 30 days, at 6 months, and again at 12 months after the payment deadline. These penalties apply to the balancing payment; the interim payments on account attract interest but not the same penalty structure. Even so, the interest adds up, and falling behind has a habit of compounding.

HMRC data shows that around 1.1 million payments on account were missed in January 2025, and in 75% of those cases it led to tax debt. The pattern we see in practice is that people miss the July payment because they are not expecting it, or because they have spent what they set aside assuming the January payment was the only one. Treating both deadlines with the same seriousness as any other bill is the straightforward fix.

If you genuinely cannot pay, contact HMRC before the deadline rather than after. Time to Pay arrangements are available and HMRC is generally more willing to engage when you approach them proactively.