Every January, we speak to clients who have just opened their HMRC online account and cannot understand why their January 31 tax bill is higher than expected. They did the maths. They knew roughly what they owed for the year. And then a figure appeared that was significantly larger.

In most cases, the reason is not a mistake. It is a system called payments on account, and HMRC builds it into every Self Assessment bill automatically once your annual tax liability crosses a certain threshold. Understanding how it works does not make the payment any smaller, but it does make it far less alarming, and it changes how you plan for the year ahead.

There are other reasons a bill can come out higher than you expected too, from a wrong PAYE tax code to income you may not have factored in fully. We will cover all of them here, along with what you can actually do if the number is more than you can comfortably pay right now.

Payments on account are advance payments towards your next year’s tax bill. HMRC asks you to pay them in two instalments: the first on 31 January (alongside any balance owed for the year just ended), and the second on 31 July. Each instalment is 50% of the previous year’s tax liability.

They are triggered automatically when two conditions are met: your previous year’s Self Assessment tax bill was over £1,000, and less than 80% of your total tax was collected at source through PAYE during the year. The second condition is why employed people on a single salary rarely see them, but self-employed sole traders, directors taking dividends, landlords, and anyone with significant income outside PAYE almost always will.

The payments on account calculation includes Income Tax and, for the self-employed, Class 4 National Insurance contributions. For the 2026/27 tax year, Class 4 NIC runs at 6% on profits between £12,570 and £50,270, and 2% above that. Class 2 NIC was abolished from April 2024, so that is no longer part of the picture.

The logic behind the system is straightforward: HMRC does not want to wait a full 20 months to collect tax on income earned early in a tax year. Whether you agree with the approach is a different matter, but knowing it exists is the first step to planning for it properly.

The year payments on account kick in for the first time is the hardest one. On 31 January, you are paying two things at once: the balance of tax owed for the year just finished, and the first instalment of payments on account for the current year. In practice, this means your January bill is 150% of your annual tax liability, not 100%.

To put numbers to it: if your Self Assessment bill for the year comes to £4,000, the total due on 31 January is £6,000 (£4,000 balancing payment plus £2,000 first payment on account). The second instalment of £2,000 then follows in July.

This is the single most common shock we see among clients filing their first Self Assessment after moving into self-employment or taking on significant dividend income. Nothing has gone wrong. HMRC has not made an error. The system is doing exactly what it is designed to do. The problem is simply that most people are not told about it in advance.

After the first year, assuming your income is broadly stable, the payments on account effectively smooth things out. You have already pre-paid, so the following January balance is smaller. The total tax paid across the year stays the same; the timing is just different from what you might expect. What matters is building this pattern into your cash flow planning from the start.

Payments on account are the most common culprit, but they are not the only one. A few other situations regularly catch people out.

Your income was higher than you realised

Even a modest increase in earnings can push you into a higher tax band or start reducing your Personal Allowance. For 2026/27 the Personal Allowance remains frozen at £12,570, and it tapers away by £1 for every £2 of income above £100,000. If your earnings crept past that threshold during the year, you may have lost some or all of your allowance without planning for it.

A wrong PAYE tax code

If your employer used the wrong tax code during the year, you may have underpaid through PAYE without realising. HMRC reclaims that underpayment through your Self Assessment bill. Job changes, multiple income sources, and benefits in kind all increase the risk of a coding error. It is worth checking your P60 and your online HMRC tax account to see whether the code used was correct.

Income you may not have fully accounted for

Rental income, freelance work, online selling above the £1,000 trading allowance, and savings interest above the relevant savings allowance are all taxable. These sources are easy to undercount when you are estimating your bill informally during the year, particularly if the amounts vary month to month. From April 2026, those with self-employment or property income over £50,000 are required to use Making Tax Digital for Income Tax, which means quarterly digital reporting to HMRC and, in principle, a clearer view of what you owe as the year progresses.

Student loan repayments and HMRC adjustments

Student loan repayments due under Plan 1, 2, or 4 are collected through Self Assessment for people outside PAYE. Similarly, if HMRC is recovering a previous underpayment in instalments, that will appear on your current bill.

If the bill is more than you can pay in one go, there are options. Acting early is important because late payment interest accrues from 1 February.

HMRC’s Time to Pay arrangement

HMRC’s self-serve Time to Pay service allows you to spread Self Assessment debts of up to £30,000 over monthly instalments, generally up to 12 months. You set it up through your HMRC online account without needing to call anyone. If you owe more than £30,000, or if you have other HMRC debts, you will need to call the Self Assessment payment helpline to agree a bespoke arrangement. The important thing is to contact HMRC before the debt becomes overdue, not after, because that affects whether a payment plan is available and on what terms.

Reducing your payments on account

If you expect your income this year to be lower than last year, you can apply to reduce your payments on account. You do this through your HMRC online account or in writing, and you state the amount you believe the correct payment should be. Be cautious here: if you reduce the payments and your actual income ends up higher, HMRC will charge interest on the shortfall. It is worth running the numbers carefully before submitting a claim to reduce, rather than guessing.

Late payment consequences

If you miss the 31 January deadline without a payment arrangement in place, HMRC charges interest on the outstanding amount from 1 February. Penalty charges apply on top of that for amounts remaining unpaid at 30 days, six months, and twelve months. The sooner you act, the less it costs.

The best time to plan for next year’s Self Assessment bill is now, not in December. A few habits make a significant difference.

Set money aside as you earn it. A rough rule of thumb for a basic-rate sole trader is to reserve around 25% to 30% of profit for tax and National Insurance combined. If your income puts you in the higher-rate band, that figure needs to be closer to 40% to 45%. The exact number depends on your personal circumstances, allowances, and expenses, which is where a proper tax review is worth doing before the year ends rather than after it.

Know your payments on account dates. The 31 July instalment is easy to forget, particularly if July is a busy month. Build it into your cash flow calendar as firmly as the January date.

Claim every allowance you are entitled to. Allowable business expenses, the trading allowance where relevant, pension contributions, the marriage allowance, and others can all reduce your liability. These are not tricks; they are part of the tax system, and claiming them accurately is straightforward when you keep good records through the year.

Review your tax position before 5 April. A pre-year-end review gives you time to make pension contributions, review the mix of salary and dividends if you are a director, or adjust how you take income, before the tax year closes and the options narrow.