If you’re self-employed, a landlord, a contractor, or receive untaxed income, understanding payment on account is essential. Many taxpayers are caught out by the 31 July tax deadline because they don’t realise they’re making an advance payment towards their next Self Assessment tax bill, rather than ping a new tax charge.
HMRC uses payments on account to collect income tax in advance from eligible taxpayers. While the system is straightforward, it can affect your cash flow if you’re unprepared or unsure how your payments are calculated. This guide explains what a payment on account is, who needs to pay it, how HMRC works out the amount due, when you can reduce your payments, and what happens if you miss a tax deadline.
Key Takeaways
• A payment on account is an advance payment towards your next Self Assessment tax bill.
• The 31 July tax deadline is usually the due date for the second payment on account.
• You normally need to pay if your Self Assessment bill exceeded £1,000 and less than 80% was collected through PAYE.
• Each payment is typically 50% of your previous year’s income tax and Class 4 national insurance liability.
• You may reduce payments if you expect lower profits, but underestimating can lead to interest charges.
• Late payment triggers interest from the day after the deadline, even if no immediate fixed penalty applies.
What Is a Payment on Account?
A payment on account is HMRC’s way of collecting income tax in advance. Rather than waiting until the following January to receive the full amount due, HMRC asks certain taxpayers to make two installment payments during the year.
Each payment is usually equal to 50% of your previous year’s income tax and Class 4 National Insurance liability. Together, the two payments contribute towards your next Self Assessment tax bill.
They do not normally cover:
• Capital Gains Tax
• Student Loan repayments
• Most other adjustments included in a Self Assessment calculation
• Any balancing payment
Because the calculation is based on your previous year’s tax bill, the amount you pay may not reflect your current income. This is why HMRC allows eligible taxpayers to apply to reduce their payment on account if their expected tax liability falls.
Payment on Account Timeline
Understanding the payment schedule is just as important as knowing how HMRC calculates the amount. Here’s when each payment is due.
|
Date |
Payment Due |
|
31 January |
First Payment on Account + any Balancing Payment |
|
31 July |
Second Payment on Account |
Missing either deadline may result in HMRC charging late payment interest. Paying on time helps you avoid extra costs and stay compliant.
Need Help With Self Assessment?
Not sure whether reducing your payment on account is the right decision? Professional advice can help. Our experienced accountants can review your expected income, estimate your tax liability, and advise whether reducing your payment on account is appropriate, helping you avoid overpaying tax or facing unexpected interest charges later.
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Who Needs to Make a Payment on Account?
Not everyone who files a Self Assessment tax return has to make a payment on account. HMRC will normally ask you to pay if:
• Your previous Self Assessment tax bill was more than £1,000.
• Less than 80% of your income tax was collected through PAYE.
You usually won’t need to make payments on account if your tax liability is £1,000 or less or if most of your tax has already been deducted through PAYE.
If you’re unsure whether these rules apply to you, check your latest Self Assessment calculation or speak to your accountant before the next tax deadline.
How HMRC Calculates Payment on Account
HMRC calculates each payment on account using your previous year’s income tax and Class 4 National Insurance liability. Each payment is normally equal to 50% of that amount, with one payment due on 31 January and the second due on 31 July.
For example, if your income tax and Class 4 National Insurance liability for the previous tax year were £10,000, your payments would usually be calculated as follows:
HMRC would normally calculate:
|
Payment |
Amount |
|
First payment on account (50%) |
£5,000 |
|
Second payment on account (50%) |
£5,000 |
|
Total paid in advance |
£10,000 |
These payments count towards your 2026/27 Self Assessment tax bill. HMRC assumes your income will remain broadly similar and calculates the payments accordingly.
(Source: Understand your Self Assessment tax bill – Payments on account)
What Is a Balancing Payment?
Payments on account are estimates. They rarely match your final tax liability exactly.
Once your next tax return is submitted, HMRC compares:
• The tax you actually owe.
• The payments on account have already been made.
Any difference becomes a balancing payment.
Example
Sarah pays two payments on account totalling £8,000. When she submits her Self Assessment return, HMRC calculates that she actually owes £9,500. She must pay the remaining £1,500 as a balancing payment by the following 31 January.
If the final liability is lower than expected, HMRC may issue a refund or offset the surplus against future tax liabilities.
How to Reduce Payment on Account
You can reduce payment on account if you expect your tax bill for the current tax year to be lower than the previous year’s. This often happens when your taxable income falls or your business circumstances change.
Reducing your payment on account does not reduce the amount of tax you owe. It simply adjusts the advance payments you make based on your expected tax liability for the current tax year. If your income is likely to be lower than the previous year, you may be able to apply for a reduction.
You may be able to reduce payment on account if:
• Your business turnover has decreased.
• Your rental income is lower than before.
• You have closed your business.
• You have retired.
• Your previous tax bill was unusually high because of a one-off increase in income.
You can apply to reduce payment on account through your HMRC online account or ask your accountant to submit the request on your behalf.
Reducing your payments can help improve cash flow, but the amount you claim should be based on a realistic estimate of your expected tax liability. If you reduce payment on account by too much and your final tax bill is higher, HMRC may charge interest on the unpaid amount.
Estimate Your Tax Before Reducing Your Payment on Account
Before asking HMRC to reduce your payment on account, it’s important to estimate your tax liability for the current tax year. A lower profit may justify a reduction, but making an inaccurate claim could result in additional tax and interest later.
Our free Self-Employed Tax Calculator helps you estimate your income tax and Class 4 National Insurance based on your expected income and allowable business expenses. It provides a useful indication of your potential Self Assessment bill, making it easier to decide whether your current payment on account still reflects your circumstances.
While the calculator offers a helpful estimate, it cannot account for every tax situation. If your income comes from several sources or your circumstances have changed significantly, professional advice can help you make the right decision before the 31 July tax deadline.
When Should You Avoid Reducing It?
Reducing payments on account is not always the right decision. Many taxpayers underestimate future income or forget about seasonal trading improvements. As a result, they can create a larger balancing payment later.
Before requesting a reduction, consider:
• Current business performance
• Confirmed contracts or projects
• Rental income expectations
• Dividend projections
• Other taxable income sources
Accurate bookkeeping and management accounts make forecasting significantly easier. Regular financial reviews can highlight whether a reduction is justified.
Making Tax Digital and Payments
From April 2026, many sole traders and landlords with qualifying business or property income above £50,000 must comply with Making Tax Digital for Income Tax.
These taxpayers must keep digital records and submit quarterly updates using compatible software. The first quarterly submission deadline falls on 7 August 2026.
Although quarterly updates become mandatory for many taxpayers, payment on account deadlines remain unchanged. You must still pay any amounts due by 31 January and 31 July unless HMRC announces changes to the payment system.
Making Tax Digital changes how records are kept and submitted, but it does not change how HMRC calculates payments on account or when they are due.
Common Mistakes to Avoid
Several issues repeatedly cause problems for taxpayers.
• Assuming July is a Filing Deadline: No tax return is due on 31 July. The deadline relates only to the second payment on account.
• Ignoring lower profits: Some taxpayers continue paying the full amount despite experiencing a significant fall in profits. This can create unnecessary cash flow pressure.
• Forgetting the balancing payment: Reducing payments without proper calculations may simply delay tax rather than reduce it.
• Poor bookkeeping: Inaccurate records make forecasting difficult and increase the risk of unexpected tax bills.
• Assuming HMRC Will Send a Reminder: Although HMRC may issue reminders in some cases, you’re responsible for knowing your payment deadlines and paying on time. Missing a tax deadline because you didn’t receive a reminder won’t usually prevent interest from being charged.
Practical Ways to Prepare
Successful tax planning starts long before July arrives. Business owners who monitor their finances regularly are usually better prepared when payment deadlines approach.
Consider taking the following steps:
• Review your latest Self Assessment calculation.
• Check upcoming payment dates.
• Maintain accurate bookkeeping records.
• Set aside money monthly for tax.
• Monitor business profitability.
• Review cash flow forecasts regularly.
• Speak to an accountant if income has changed significantly.
Small adjustments throughout the year often prevent major financial pressure later.
Conclusion
Understanding how payment on account works can help you manage your tax obligations with confidence and avoid unexpected costs. Because these payments are advance contributions towards your next Self Assessment tax bill, planning ahead is essential, especially before each tax deadline.
If you’re unsure whether your payment on account is correct or your income has changed significantly, reviewing your position before the tax deadline can help you avoid unexpected costs and stay compliant with HMRC. Taking action early can improve cash flow while reducing the risk of interest charges and unexpected balancing payments.
