Payments on account explained simply: they’re advance payments towards your next tax bill, collected by HMRC while the current tax year is still running. If you’ve just filed your first Self Assessment return and the amount due is far higher than you expected, this is almost certainly why.

Most people filing for the first time don’t know payments on account exist until they’re staring at the figure. You settle what you owe for the year — and then HMRC asks for a chunk of next year’s bill on top. In a single payment. Due the same day. It’s a legitimate system, and once you understand the logic behind it, it makes sense. But the first encounter with it tends to be a shock.

Here’s how it works, when it applies, and what your options are if your income has changed since last year.

HMRC uses payments on account to collect income tax and Class 4 National Insurance on a rolling basis, rather than waiting for you to file and pay in full once a year. The idea is that employed people pay tax monthly through PAYE, so self-employed people should also pay something during the year — not just after it ends.

The system works by looking at what you owed last year and splitting that figure in half. Each half becomes one payment on account — one due in January, one due in July. These aren’t extra tax, they’re prepayments that get credited against whatever you actually owe when you file your return.

So when you file your 2025–26 return by 31 January 2027, HMRC will calculate your actual tax liability for that year, deduct the two payments on account you’ve already made, and either ask for a balancing payment (if you owe more) or issue a refund (if you paid too much).

The payments on account figure is based purely on your prior year’s tax bill — HMRC has no way of knowing whether your income has stayed the same, gone up, or dropped significantly. It’s a projection, not a precise calculation.

Payments on account don’t apply to everyone. HMRC won’t charge them if either of the following is true:

• Your tax bill for the previous year was less than £1,000
• More than 80% of your tax was already collected at source — for example, through PAYE on employed earnings

If you fall outside those exemptions, you’re in the payments on account system. And the deadlines are fixed:

• 31 January — balancing payment for the previous tax year, plus first payment on account for the current year
• 31 July — second payment on account for the current year

The 31 January date is where the surprise tends to hit. You owe the settlement for one year and the first instalment for the next, all at once. For someone whose tax bill was, say, £4,000 in their first year, that January payment could be £6,000: the £4,000 they owe plus £2,000 towards the year ahead.

As of September 2026, the second payment on account for the 2025–26 tax year was due 31 July 2026. The next significant date is 31 January 2027, when the 2025–26 balancing payment falls due, alongside the first payment on account for 2026–27.

Because payments on account are based on last year’s figures, they can significantly overstate what you’ll actually owe — particularly if your income has dropped, you’ve taken on more expenses, or you’ve picked up more employed income that’s taxed at source.

In those situations, you can apply to reduce your payments on account. You don’t need HMRC’s approval to do it — you make the claim yourself, either online through your Self Assessment account or by submitting form SA303. The decision is yours to make.

The legitimate grounds for reducing are: your profits or other taxable income have gone down, your tax relief has increased, or more of your income is now being taxed at source. You don’t need to prove it before making the claim — but you do need to have a reasonable basis for the reduction.

The risk, and it’s worth being clear about this, is getting it wrong. If you reduce your payments on account and your actual tax bill turns out to be higher than the reduced amount you paid, HMRC will charge interest on the shortfall. That interest runs from the original due date, not from when you filed. The reduction process is straightforward and HMRC rarely penalises people for honest errors, but reducing to nil when your income has only dipped slightly is the kind of thing that can create a bigger cash flow problem down the line than the one you were trying to avoid.

Our advice: reduce if the numbers genuinely support it, not just to ease the immediate pressure.

Once you file your return, any difference between what you paid on account and what you actually owe is settled through a balancing payment. If your income grew during the year, the balancing payment will be higher. If it fell, you’ll get the overpaid amount back as a refund.

The balancing payment for a given tax year is always due by 31 January following the end of that year. So for the 2025–26 tax year, it’s due 31 January 2027 — the same deadline as the first payment on account for 2026–27.

The practical implication of this is that January tends to be the most expensive month in the self-employed calendar. Planning ahead matters. A few things that help:

• Setting aside a percentage of each payment you receive throughout the year — 25–30% is a reasonable starting point for basic rate taxpayers, though it depends on your income level and other tax reliefs in play
• Paying payments on account on time even when cash flow is tight — late payment interest runs from the due date, so deferring doesn’t help as much as it seems
• Using HMRC’s Time to Pay arrangements if a bill genuinely can’t be met — these can be set up online before the deadline and spread payments over several months

Good bookkeeping throughout the year makes the January settlement far less of a shock, because you can see where you’re likely to land well before the return is due.