Payments on Account Explained: What They Are and How They Work (UK 2026 Guide)

If you’re self-employed in the UK, you may have come across the term “payments on account” when completing your Self Assessment tax return.

For many people, this is one of the most confusing parts of the UK tax system—especially when your tax bill suddenly appears much higher than expected.

In this guide, we’ll clearly explain what payments on account are, who needs to pay them, how they are calculated, and how to reduce them if necessary.

What Are Payments on Account?

Payments on account are advance payments towards your next tax bill.

Instead of paying all your tax at once, HMRC asks you to make two instalments each year, based on your previous year’s tax liability.

This system helps spread the cost of tax over the year.

Who Needs to Make Payments on Account?

You must make payments on account if:

• Your Self Assessment tax bill is more than £1,000, AND
• Less than 80% of your tax is collected at source (e.g. through PAYE)

This typically applies to:

• Sole traders
• Freelancers
• Landlords
• Side hustle income earners

How Do Payments on Account Work?

Each payment is 50% of your previous year’s tax bill.

You make two payments:

• 31 January – first payment
• 31 July – second payment

Example: How Payments on Account Are Calculated

Let’s say your tax bill for the 2024/25 tax year is:

£3,000

Step 1: Calculate payments on account

• First payment: £1,500 (50%)
• Second payment: £1,500 (50%)

Step 2: What you pay in January

In January, you pay:

• Your current tax bill: £3,000
• PLUS first payment on account: £1,500

Total January payment: £4,500

Step 3: July payment

• Second payment on account: £1,500

Why Does Your Tax Bill Seem So High?

This is where many people get caught out.

In your first year of paying payments on account, you are effectively paying:

• Your current year’s tax, AND
• Half of next year’s tax in advance

This can make your tax bill feel like it has doubled.

What Happens the Next Year?

Your payments on account are used to offset your next tax bill.

Example:

If your next tax bill is £3,200:

• You’ve already paid £3,000 (via payments on account)
• You only owe £200 extra

If your tax bill is lower:

• You may receive a refund

What Is a Balancing Payment?

A balancing payment is the difference between:

• Your actual tax bill
• Payments on account already made

This is paid on 31 January following the tax year.

Can Payments on Account Change?

Yes—they are based on your previous year’s income.

If your income increases:

• Your tax bill increases
• Your payments on account increase

If your income decreases:

• You may be overpaying

How to Reduce Payments on Account

If you expect your income to drop, you can apply to reduce your payments on account.

You can do this through your HMRC account.

Important Warning

Only reduce your payments if you are confident your income will be lower.

If you reduce them too much:

• You may face interest charges
• You will still need to pay the difference later

When You Don’t Need to Pay Payments on Account

You won’t need to make payments on account if:

• Your tax bill is under £1,000
• You pay most of your tax through PAYE
• This is your first year of self-employment

Payments on Account for Side Hustles

If you have a side hustle, payments on account may still apply if:

• Your additional income creates a tax bill over £1,000

This often surprises people who:

• Sell online
• Freelance occasionally
• Have rental income

Do Payments on Account Include National Insurance?

No—this is important.

Payments on account only cover:

• Income Tax
• Class 4 National Insurance

They do not include:

• Class 2 National Insurance

Class 2 NIC is included in your balancing payment.

Key Dates to Remember

Missing these deadlines can result in penalties and interest.

What Happens If You Don’t Pay?

If you miss a payment:

• Interest will be charged
• Penalties may apply
• HMRC may take enforcement action

Tips to Manage Payments on Account

1. Set Money Aside Monthly

Save a percentage of your income to cover tax.

2. Use a Separate Tax Account

Keep your tax funds separate from your spending money.

3. Track Your Income Regularly

This helps avoid surprises.

4. Plan for the First Year Shock

Your first January bill is always the biggest.

Common Mistakes to Avoid

Underestimating Your Tax Bill

Many people forget about payments on account entirely.

Not Budgeting for January

This is when the largest payment is due.

Reducing Payments Incorrectly

This can lead to unexpected bills and interest.

How Payments on Account Fit Into Your Overall Tax

Payments on account are just one part of your Self Assessment obligations.

You should also understand:

• Allowable expenses
• Working from home expenses
• National Insurance contributions

These all affect your final tax bill.

Should You Worry About Payments on Account?

Not really—but you should understand them.

They don’t increase your tax bill overall—they simply change when you pay it.

Once you’ve gone through one full cycle, they become much easier to manage.

Quick Summary

• Payments on account are advance tax payments
• Based on your previous year’s tax bill
• Paid in two instalments (January and July)
• Can be reduced if income drops
• Often cause confusion in the first year

Payments on account are one of the most misunderstood parts of the UK tax system.

While they can feel like a financial shock initially, they are simply a way of spreading your tax payments across the year.

Understanding how they work—and planning ahead—can help you avoid surprises and stay in control of your finances.

Disclaimer

This article is for general informational purposes only and does not constitute financial, tax, or legal advice. Tax rules and regulations can change, and their application will vary depending on individual circumstances. You should not rely solely on the information in this article when making financial decisions. We recommend consulting a qualified accountant or tax professional for advice tailored to your specific situation. While every effort has been made to ensure the accuracy of the information, no responsibility is accepted for any errors or omissions.