TL;DR
UK Self-Assessment payments on account are pre-payments of next year's tax, 50% each on 31 January and 31 July, applying where prior bill exceeded GBP 1,000 and less than 80% was collected at source. This guide covers calculation, reduction, and managing cash flow.
Key facts
- Payments due 31 January and 31 July.
- Each payment is 50% of the prior year's combined income tax and Class 4 NI bill.
- Apply where prior bill exceeds GBP 1,000 and less than 80% collected at source.
- Reduction available where lower income is expected.
- Over-reduction attracts interest on shortfall.
- First-year sole traders pay double in first January (year-end plus first payment on account).
- Refund route available where actual bill is lower than payments.
- Time to Pay arrangement available if payment is unaffordable.
Payments on account are HMRC's mechanism for collecting Self-Assessment tax in advance of the next year-end. The intent is to smooth tax collection across the year rather than concentrate it in one large January bill. The mechanism catches first-year self-employed traders with a double-payment in their first January, which is the most common source of cash flow surprise.
This guide covers when payments on account apply, how they are calculated, how to reduce them where appropriate, and how to manage cash flow around the schedule.
When payments on account apply
Payments on account apply where the Self-Assessment bill (income tax + Class 4 NI) for the year exceeds GBP 1,000 and less than 80% of the bill was collected through deduction at source (PAYE on employment income, CIS deductions, etc.).
The 80% test is important. A taxpayer with substantial PAYE deductions on a salary plus modest self-employed income may not be in payment-on-account scope because most of the tax is already collected through PAYE. A pure self-employed trader with no PAYE collection will typically be in scope.
Each payment is 50% of the prior year's total bill. The two payments are due 31 January (with the balancing payment for the year just ended) and 31 July of the same calendar year. The actual bill for the new year is calculated when that year's SA return is filed, with a balancing payment or refund settling any difference.
Worked example: 2026/27 SA bill is GBP 8,000 (income tax + Class 4 NI). Payments on account for 2027/28 are GBP 4,000 each, due 31 January 2028 (alongside the GBP 8,000 balancing payment for 2026/27) and 31 July 2028. The 31 January 2028 cash outflow is therefore GBP 12,000.
The first-year double payment
First-year self-employed traders typically pay tax twice in their first January: the balancing payment for the year just ended plus the first payment on account toward the new year. This is the source of most cash flow surprise.
Worked example: a freelancer starts in June 2026 and earns GBP 30,000 of profit in 2026/27. SA bill for 2026/27 is around GBP 5,000 (income tax + Class 4 NI). On 31 January 2028: pay the GBP 5,000 balancing payment for 2026/27 plus GBP 2,500 first payment on account for 2027/28. Total cash outflow GBP 7,500 in January 2028.
The second payment on account of GBP 2,500 follows on 31 July 2028. The 2027/28 SA return is filed by 31 January 2029, with a balancing payment or refund settling the actual 2027/28 position.
Practical action: setting aside 25-30% of profits as the trader earns them, rather than waiting until January to find the money, smooths the cash flow. A separate savings account labelled 'tax reserve' helps the discipline. The 30% allowance covers income tax plus Class 4 NI plus a buffer for the payments on account that follow.
Reducing payments on account
Where the trader expects lower income in the new year (illness, parental leave, business slowdown, retirement), they can reduce payments on account through the SA return or the Personal Tax Account. The reduction is to the trader's estimate of the next year's bill; both January and July payments adjust to 50% of the new estimate.
Over-reduction (paying less than the eventual bill needs) attracts interest under section 101 Finance Act 2009 on the shortfall from the original due date. The interest rate runs at base rate plus 2.5 percentage points (typically 7-8.5% in recent years).
Conservative reduction is the safe approach. Reducing to a figure the trader is confident the actual bill will at least match avoids interest. Where the actual bill is lower than the reduced payments, HMRC refunds the difference after the year-end return is filed.
Worked example: a trader's 2026/27 bill was GBP 10,000. They expect 2027/28 to be around GBP 7,000 due to taking 3 months off. They reduce the payments on account to GBP 3,500 each. The January 2028 cash outflow becomes GBP 13,500 (GBP 10,000 balancing + GBP 3,500) instead of GBP 15,000. The actual 2027/28 bill is GBP 7,200; January 2029 has a small additional balancing payment of GBP 200.
Time to Pay and cash flow management
Where payments on account are unaffordable when due, Time to Pay arrangements are available through HMRC. The arrangement spreads the payment over typically up to 12 months for amounts under GBP 30,000. Setting up before the 30-day late payment penalty bites avoids the 5% penalty.
Time to Pay is requested through the Personal Tax Account online service or by phone (0300 200 3820). HMRC asks for details of income, expenses, and the proposed instalment plan. Approval is typically given within minutes for amounts under GBP 30,000 with compliance history; larger amounts may need detailed financial review.
Interest continues to accrue during the arrangement at the official rate. The cost is moderate but the protection against penalties is the main benefit. The arrangement is reported on the SA record and can affect future requests (a pattern of repeat Time to Pay may attract closer scrutiny).
Practical action: where cash is tight in January, calling HMRC before the deadline produces better outcomes than missing the payment. HMRC officers handling Time to Pay are typically helpful when the request comes proactively rather than reactively.
Setting aside tax through the year
The disciplined approach to payments on account is to set aside tax as profit is earned, not wait until January to find the money. The standard rule of thumb: set aside 25-30% of every receipt to a separate tax savings account.
The 25-30% covers income tax at basic rate, Class 4 NI, and a buffer for the payments on account schedule. Higher-rate earners may need to set aside closer to 35-40%. Calculator-based tools (income, NI, payments on account projector) help dial in the right percentage.
A separate bank account labelled 'tax reserve' creates the visual separation. Each business receipt has 25-30% transferred immediately to the reserve. When the SA payment is due, the reserve is drawn down without affecting the working business cash.
Practical action: setting up the discipline at the start of self-employment avoids the cash flow shock that catches first-year traders. The tax reserve also smooths the timing of the payments-on-account double payment in the first January.
Interest on late or wrong payments on account
Interest under section 101 Finance Act 2009 accrues on unpaid payments on account from the due date. The HMRC late payment interest rate is base rate + 2.5 percentage points, updated within weeks of any Bank of England base rate change. For periods through 2025 the rate has run 7-8.5%.
Where payments on account were reduced (under section 59A(3) TMA 1970) and the actual bill turns out higher than expected, interest accrues on the shortfall from the original due date. Even modest reductions can produce material interest if the actual bill is much higher.
Repayment supplement (interest paid by HMRC on over-payments) accrues from the original due date at a much lower rate (base rate - 1 percentage point, currently around 4%). The asymmetry means over-paying and waiting for refund is less attractive than getting the calculation right.
Worked example: a trader reduced their 2027/28 payments on account to GBP 3,000 each (from GBP 5,000 each based on prior year). Actual 2027/28 bill is GBP 9,000. The trader paid GBP 6,000 total in payments on account; underpaid by GBP 3,000. Interest at 8% accrues on the GBP 3,000 from 31 January 2028 (first payment date) - around GBP 240 of interest if the balance is settled 12 months later.
Disclaimer
This article provides general information based on rules and figures published by UK government and regulator sources as of May 2026. It is not personal financial, legal, immigration or tax advice. Rules, fees and figures change and individual circumstances vary. Readers should check primary sources or consult a qualified, regulated adviser before acting on any information here.
Frequently asked questions
Why am I paying tax twice in January?
Because the first January after starting self-employment combines the balancing payment for the year just ended with the first payment on account for the next year. A GBP 6,000 bill for the prior year produces a GBP 9,000 January cash outflow (GBP 6,000 balancing + GBP 3,000 first payment on account). The second payment on account of GBP 3,000 follows on 31 July. Setting aside 25-30% of profits as earned avoids the surprise.
Can I reduce my payments on account?
Yes through the SA return or Personal Tax Account where you expect lower income in the new year. The reduction adjusts both January and July payments. Over-reduction attracts interest at the official rate on the shortfall under section 101 Finance Act 2009. Conservative estimates avoid interest; HMRC refunds any over-payment once the actual bill is calculated.
What if I can't pay my payment on account?
Set up a Time to Pay arrangement through the Personal Tax Account or by phone (0300 200 3820). Setting up before the 30-day late payment penalty bites avoids that 5% penalty. Interest continues at the official rate. HMRC typically agrees monthly instalments over up to 12 months for amounts under GBP 30,000 with reasonable compliance history.
Do payments on account include Class 4 NI?
Yes. Payments on account are 50% of the combined income tax and Class 4 NI bill from the prior year. Class 2 voluntary contributions are separate and not included. The combined figure is used because Class 4 is collected through Self-Assessment alongside income tax.
Will I get a refund if my actual bill is lower?
Yes. Once the actual SA return is filed for the year, HMRC compares the payments on account against the actual bill. Where payments exceed the bill, the difference is refunded by bank transfer (typically within 5 working days of claim through the PTA). Where actual exceeds payments, the balancing payment is due on 31 January following the year end.