Payments on Account: The First-Year Shock and How to Cut It
Written by Sampsa Vainio
Why is your first Self Assessment bill so much bigger than the tax you owe for the year? Because HMRC asks for payments on account: two advance instalments towards next year's tax, each worth half of the bill you just settled. In your first year they arrive on the same day as the balancing payment for the year that has ended, so 31 January can demand 150% of a single year's tax in one go. If your last tax bill was £1,000 or more and less than 80% of it was collected at source, you are in the system.
This guide walks the first-year cash-flow shock as a dated timeline, then shows when and how to reduce the payments with form SA303 without walking into the interest trap that catches people who cut too far.
What payments on account are
HMRC's definition is short: "'Payments on account' are payments towards your next tax bill (including Class 4 National Insurance if you're self-employed). They help spread the cost of your tax by making payments in 2 instalments." The full wording is on the gov.uk page Understand your Self Assessment tax bill.
Three facts do most of the work:
- Each payment is half the tax you owed last year. HMRC sizes the instalments off your most recent completed return, not a forecast of the year ahead.
- They fall due on 31 January and 31 July. The January instalment shares its date with the balancing payment for the previous tax year, which is where the pain concentrates.
- They cover income tax and Class 4 National Insurance only. Class 2 NIC (where you pay it voluntarily), capital gains tax, and student loan repayments are excluded from the instalments and land instead in your balancing payment on 31 January.
The balancing payment is the reconciliation. HMRC works it out "by deducting the payments on account you've made from the total tax you owe", and it is due by midnight on 31 January the following year.
Do you have to make them? The £1,000 and 80% test
Not every taxpayer gets payments on account. HMRC states you must make them "unless either: the amount of tax you owed last year was less than £1,000" or "last year you paid more than 80% of the tax you owed outside of Self Assessment." Tax paid outside Self Assessment means amounts already deducted at source, most commonly through PAYE on a salary.
Both exemptions are escape routes, so you are in the system only when neither applies:
| Your last Self Assessment bill | Tax already collected at source | Payments on account? |
|---|---|---|
| £1,000 or more | 80% or less of the bill | Yes |
| £1,000 or more | More than 80% of the bill | No |
| Under £1,000 | Any share | No |
A full-time sole trader with no PAYE income clears the £1,000 line quickly and has nothing collected at source, so payments on account are the norm. Someone with a large salary and a small side trade often escapes them, because PAYE covers most of their tax. That threshold sits close to the trading allowance and registration decisions a new side business faces in its first year.
The first-year cash-flow shock: a worked timeline
The reason payments on account surprise people is timing, not the total tax. Take a sole trader whose first full year of self-employment is 2025/26, with an income tax and Class 4 NIC bill of £3,000 and nothing collected at source.
| Date | What falls due | Amount |
|---|---|---|
| 31 Jan 2027 | 2025/26 balancing payment plus first 2026/27 payment on account | £3,000 + £1,500 = £4,500 |
| 31 Jul 2027 | Second 2026/27 payment on account | £1,500 |
| 31 Jan 2028 | 2026/27 balancing payment plus first 2027/28 payment on account | Depends on 2026/27 profit |
The £4,500 due on 31 January 2027 is 150% of the £3,000 the year actually cost. You settle the full first-year bill and pre-pay half of the next year on the same day. By 31 July 2027 you have handed over £3,000 towards 2026/27, matching your prior bill, so the following January only asks for the difference between your real 2026/27 tax and the £3,000 already paid, plus the next year's first instalment.
The system is not charging you extra. It is pulling forward the first year's advance payments into a single January, which is exactly the moment a new business is least prepared for it. The fix is to know the number is coming and set money aside from your first invoice, not to be told about it by the calculation on 30 January.
When and how to reduce your payments on account
Payments on account assume next year looks like last year. When you have good reason to expect a lower bill, you can ask HMRC to reduce them so you are not lending the Treasury money you will only get back later.
You can apply two ways, both set out on the gov.uk guidance. Online: "Sign in to your online account. Select the option to view your latest Self Assessment return. Select 'Reduce payments on account'." By post: send form SA303, Claim to reduce payments on account, to your tax office. HMRC lists the valid reasons as your business profits or other income going down, the tax relief you are entitled to going up, or tax deducted at source rising above the previous year's level.
The interest trap
Reducing too far costs money. HMRC's rule is blunt: "If you reduce your payments on account and your tax bill is higher than expected, you'll be charged interest on the difference." The interest is backdated to the original instalment dates, as if you had underpaid all along.
Take the same trader, with 2026/27 payments on account set at £1,500 each off the prior £3,000 bill. Expecting a quieter year, they reduce each instalment to £1,000, a total of £2,000. The year turns out steadier than feared and the actual 2026/27 bill is £2,600.
They under-reduced by £600. HMRC charges late-payment interest on that £600 from 31 January 2027 and 31 July 2027, the dates the money should have arrived. That interest rate is 7.75% from 9 January 2026, set at the Bank of England base rate plus 4 percentage points under the HMRC interest rates for late payments. The £600 balancing payment itself is then due on 31 January 2028.
Had the year genuinely been quiet, with a real bill of £1,800, the £2,000 in reduced instalments would have overpaid by £200, which HMRC refunds with repayment interest. The safe move is to reduce to your honest best estimate, not to the smallest number you can justify: aim low and you pay interest, aim at the truth and the worst case is a small refund.
Common mistakes with payments on account
Treating the first January as a one-off bill. The £4,500 is not a penalty or an error. Half of it is next year's tax paid early, so the money is not gone, it is credited against 2026/27. Read it as two payments stacked on one date.
Forgetting the July instalment exists. The second payment on account lands on 31 July with no return to prompt it. It is easy to spend the money over the summer and be caught short. Diarise it the day you file.
Reducing on optimism. A hopeful guess that the year will be slow is not a reason to cut payments on account. If the profit holds up, the interest follows. Reduce only on evidence: a lost contract, a career break, a genuine drop in trade.
Ignoring what the bill is built on. Payments on account are half of last year's tax, and last year's tax is your profit after allowable costs. Every legitimate expense you failed to claim inflated last year's bill, which inflates both instalments this year. Clean records shrink the whole chain, which is why keeping self-employed expenses in order pays twice.
How SparkReceipt helps you size the bill your payments are based on
Payments on account are only as large as the tax return that sets them, and that return is only as accurate as the expenses you captured. Miss a year of receipts and your profit looks higher than it was, so both instalments overshoot.
SparkReceipt scans receipts and invoices with AI, pulls out the amount, date, VAT and supplier, and files each one against a category so nothing slips through by the time you file. Its expense tracking keeps a running total of deductible costs across the year, so you can estimate your profit, and therefore your likely tax bill and next set of payments on account, long before 31 January. Knowing that number early is the difference between setting money aside monthly and being ambushed by it. You can start on the free plan and see the pricing plans as your record-keeping grows.
Frequently asked questions
Are payments on account extra tax? No. They are advance instalments towards a tax bill you have not yet been assessed for. Every pound is credited against next year's liability, so you are paying the same tax earlier, not more of it.
Why is my first bill 150% of my tax? Because 31 January combines the balancing payment for the year that has ended with the first payment on account for the year that has started. The balancing payment is the full bill; the first instalment is half of it again.
When are payments on account due? 31 January and 31 July. The January instalment shares its date with the balancing payment and the online filing deadline, which is why so much falls on one day. Our guide to the Self Assessment deadlines sets out the full calendar.
Can I stop making payments on account? Only by meeting one of HMRC's exemptions: a final bill under £1,000, or more than 80% of your tax collected at source. If your circumstances change you can reduce them with form SA303, but you cannot opt out while you still meet the criteria.
What happens if I pay a payment on account late? HMRC charges interest from the due date at the prevailing late-payment rate, currently 7.75%. Paying on time avoids it; there is no benefit to holding the money back.
Do payments on account include VAT? No. Self Assessment payments on account cover income tax and Class 4 National Insurance. VAT runs on its own returns and payment cycle and is entirely separate.
Key takeaways
- Payments on account are two advance instalments towards next year's tax, each half of last year's bill, due 31 January and 31 July.
- You make them when your last bill was £1,000 or more and 80% or less of your tax was collected at source.
- In your first year, 31 January asks for the balancing payment plus the first instalment together, which is 150% of a single year's tax in one payment.
- You can reduce the instalments with form SA303 when you genuinely expect a lower year, online or by post.
- Reduce too far and HMRC charges 7.75% interest on the shortfall, backdated to the original dates. Estimate honestly rather than optimistically.
- The instalments are sized off last year's profit, so complete expense records keep both this year's payments in check.