You’ve just filed your first Self-Assessment tax return. You worked out your tax bill. You’ve budgeted for it, saved for it, and you’re ready to pay. Then you log into your HMRC account and see the actual amount is much higher than you thought.
What just happened?
Welcome to payments on account, one of the most confusing and least-explained parts of the self-employed tax system.
Every year, thousands of newly self-employed people get blindsided by this January surprise. The shock isn’t just about the number on the screen. It’s the realisation that you’ve somehow miscalculated, or worse, that nobody warned you this was coming.
This guide will explain exactly what payments on account are, why HMRC requires them, when you need to make them, and how to manage them.
What Are Payments on Account?
Payments on account are advance payments you make towards next year’s tax bill, based on what you owed this year.
HMRC assumes your income will stay roughly the same from one year to the next, so they ask you to pay half of this year’s bill as a deposit for next year.
The system works in two instalments. You pay 50% of your previous year’s tax bill on 31 January, and another 50% on 31 July.
These payments go towards your tax liability for the current tax year, which you won’t actually calculate until you file your return the following January.
So, on 31 January, you’re not just paying your tax bill for the year you’ve just finished. You’re paying that bill plus the first payment on account for the year you’re currently in.
That’s why, for example, a £2,000 tax bill becomes a £3,000 payment. You’re paying £2,000 for last year and £1,000 (half of £2,000) towards this year.
It feels like you’re being taxed one and a half times, and in a sense, you are. But HMRC sees it differently. They argue you’re simply paying tax closer to when you earn the income, similar to how employees pay tax through PAYE every month.
The difference is that employees expect tax to be deducted automatically. Self-employed people expect to pay once a year.
When Do You Have to Make Payments on Account?
Not everyone in Self-Assessment has to deal with payments on account. You’re only required to make them if both of the following conditions apply:
- Your Self-Assessment tax bill was more than £1,000: This threshold includes income tax and Class 4 National Insurance contributions, but it excludes things like student loan repayments and Capital Gains Tax.
- Less than 80% of your tax was deducted at source: If you’re employed and most of your tax is already collected through PAYE, you probably won’t need to make payments on account. This rule is designed for people whose income isn’t automatically taxed.
Most self-employed people, freelancers, and landlords fall into both categories. If you made decent money from self-employment or rental income, you’ll almost certainly trigger the payments on account requirement.
Read our article on when you need to file a Self-Assessment without being a sole trader specifically.
The 150% Problem: Your First Year Is the Hardest
The real shock comes the first time you have to make payments on account. This is when you experience what many accountants call the “150% payment.”
Let’s say you file your 2024/25 tax return in January 2026, and your tax bill is £4,000.
Because this is over £1,000, HMRC triggers payments on account for the following year. Here’s what you actually owe on 31 January 2026:
- £4,000 for your 2024/25 tax bill
- £2,000 for your first payment on account (50% of £4,000) towards 2025/26
- Total: £6,000
That’s 150% of your actual tax bill, all due on the same day. If you’ve only budgeted for £4,000, you’re suddenly £2,000 short. This catches thousands of people out every single year.
You’ll then pay your second instalment of £2,000 in July 2026. When you file your next return in January 2027, you’ll settle up based on what you actually owed for 2025/26, and the cycle continues.
After the initial shock, it becomes more predictable, but that first hit is brutal if you’re not prepared for it.
Can You Reduce Your Payments on Account?
If you know your income is dropping, you don’t have to pay the full amount HMRC asks for.
You can apply to reduce your payments on account, but you need to be careful about getting this right.
There are legitimate reasons to request a reduction:
- Your business is winding down or you’re transitioning to employment
- You’ve lost major clients or contracts
- You’re taking a career break or parental leave
- Your rental property has become vacant
- You’re approaching retirement and won’t pay Class 4 National Insurance
To reduce your payments on account, you can either do it when you file your tax return or apply separately through your HMRC online account. Select “reduce payments on account” and provide your revised estimate. You’ll need to explain why you think your tax bill will be lower.
HMRC will usually accept your declaration without challenge, but there’s a catch. If you reduce your payments and then your actual tax bill turns out higher than you estimated, you’ll be charged interest on the shortfall.
Here’s an example. Say HMRC expects you to pay £2,000 on 31 January and £2,000 on 31 July. You reduce both payments to £1,000 each because you think your income will drop. But when you file your return the following January, you discover you actually owed the full £4,000. You’re now £2,000 short.
HMRC will charge you interest on that £2,000 from the dates you should have paid it (31 January and 31 July), not from when you filed the return. At the recent rates of around 8% per year, that’s roughly £120 in interest charges. Any cash flow benefit you gained by reducing your payments just disappeared.
Only reduce your payments on account if you’re genuinely confident your income will be lower. You need actual evidence: fewer bookings, lost contracts, business closure plans, or a move into employment. Don’t reduce payments based on hope.
What Happens If You Can’t Afford Your Payment on Account?
If you can’t afford the full amount due in January, don’t ignore it. HMRC has options for people who need more time to pay.
For amounts up to £30,000, you can set up a payment plan online through the Time to Pay service. This lets you spread your tax bill over monthly instalments, typically up to 12 months. You need to have filed your return and be within 60 days of the payment deadline.
Interest still applies, but you’ll avoid late-payment penalties of 5% at 30 days late, another 5% at 6 months, and a final 5% at 12 months. If you owe more than £30,000, call HMRC directly to arrange a plan. The key is to act early rather than waiting for the problem to get worse.
Read our article on Self-Assessment penalties here.
How to Budget for Payments on Account
The best way to handle payments on account is to expect them from the start and save accordingly. Consider the following:
- Remember the 150% in your first year: When payments on account first kick in, you’ll pay your actual tax bill PLUS 50% towards next year on 31 January. If your tax bill is £4,000, you need £6,000 ready.
- Don’t forget the July payment: You’ll owe another 50% on 31 July. Set a reminder months in advance so you’re not scrambling to find the cash in the middle of summer.
- File early to know what’s coming: You can file your tax return from 6 April onwards. Filing early means you’ll know your exact payments on account amounts by summer, giving you six months to save rather than waiting until January.
- Track your running total: Many accounting software platforms show your estimated tax liability throughout the year, so you can see if you’re saving enough or need to put more aside.
How Double Point Can Help
Payments on account can feel overwhelming, especially when you’re dealing with them for the first time.
At Double Point, we work with self-employed individuals, landlords, and company directors to take the stress out of this process.
We’ll help you calculate exactly what you’ll owe throughout the year so there are no surprises in January, identify any reliefs or allowances that could reduce your bill, and set up a plan.
And if you’re already facing a tax bill you can’t afford, we can help you negotiate a Time to Pay arrangement with HMRC and give you a realistic plan to clear the debt while keeping your business running.
Book a consultation with Double Point today, and let our chartered accountants take the confusion out of your tax affairs.