What Are Payments on Account? Deadlines, Calculation, and Reductions

Payments on account are advance instalments toward your next Self Assessment tax bill. HMRC collects them in two chunks, each equal to half of your previous year’s income tax and Class 4 National Insurance liability. If last year’s Self Assessment bill came to £6,000, you’d pay £3,000 on 31 January and another £3,000 on 31 July toward the current year’s tax.¹ The system mostly catches sole traders, freelancers, and landlords whose tax isn’t already collected through an employer’s payroll.

Who Has to Make Them

You’re pulled into the payments on account cycle automatically unless one of two things is true: your previous Self Assessment bill was under £1,000, or more than 80% of the tax you owed was already collected at source, through PAYE or bank interest deductions for example.¹

That second exemption matters most if you have a salaried job alongside self-employed income. When payroll handles the bulk of your tax and your side income generates a relatively small extra liability, you usually stay out of the payments on account system. Once your untaxed income pushes past those thresholds, the instalments kick in.

What They Cover

Payments on account cover income tax and, for the self-employed, Class 4 National Insurance contributions.¹ They don’t cover everything on your Self Assessment bill. Capital gains tax is excluded, so any CGT is settled separately through your balancing payment. Student loan repayments collected through Self Assessment are also left out, so a student loan balance won’t inflate your advance payments.

How the Amount Is Calculated

HMRC takes your total income tax and Class 4 National Insurance from the previous tax year and splits it in half. Each instalment is 50% of that figure. If your prior year’s bill was £4,200, each payment on account is £2,100.¹

After the tax year ends and you file your return, HMRC compares what you actually owe against what you’ve already paid through the two instalments. If you owe more, the difference becomes your balancing payment. If you’ve overpaid because your income dropped, HMRC refunds the excess or credits it toward your next bill.

The Two Deadlines

The instalments fall on fixed dates every year:

First payment on account: 31 January, the same date as your previous year’s balancing payment and your tax return filing deadline.
Second payment on account: 31 July.

Both must reach HMRC by midnight on the due date.¹ The schedule doesn’t shift based on when you file your return. Submit in April or wait until January — the payment dates are the same.

The January date deserves particular attention. On that single day you may owe your balancing payment for the prior tax year, your first payment on account for the current year, and your tax return itself is due. It’s the pinch point where most people either stay ahead or fall behind.

The First-Year Shock

The first time you enter the payments on account system catches many new freelancers off guard. If you didn’t make payments on account the previous year, your 31 January bill includes your full tax liability for the year just ended plus the first payment on account toward next year.¹

Take a concrete example. Say your tax bill for your first full year of self-employment is £3,000. By 31 January you’d owe that £3,000 in full, plus a first payment on account of £1,500 toward next year. That’s £4,500 due on one date. Then on 31 July another £1,500 falls due for the second payment on account. In total you’d pay £6,000 within about six months of receiving your first Self Assessment bill.¹

A common rule of thumb is to set aside 25% to 30% of your profit each month in a separate savings account from the moment you start earning self-employed income, so the January bill doesn’t require emergency borrowing.

Reducing Your Payments on Account

If you expect your income to fall significantly compared to last year, you can apply to reduce your payments on account so they reflect what you actually expect to owe. Common reasons include losing a major client, taking time off for illness, or winding down part of your business.

The process uses form SA303, which you can submit online through your HMRC account or print and post. Online is faster and gives you an immediate confirmation. You’ll need your Unique Taxpayer Reference (UTR) and a specific estimate of your expected tax liability for the year. HMRC doesn’t require evidence uploads, but you do have to explain why your income has fallen and how you arrived at the new figure. The claim deadline is 31 January after the end of the relevant tax year.²

Accuracy matters. If you underestimate your income and end up owing more than your reduced payments covered, HMRC charges interest on the shortfall from the original due date. That interest currently runs at 7.75% per year.³ There’s no penalty for an honest miscalculation, but the interest alone can sting if the gap is large. When in doubt, reduce by less than you think is justified.

How to Pay

When paying by any method, you’ll need your 11-character payment reference, which is your 10-digit UTR followed by the letter “K”.⁴ The options differ mainly on how quickly the money clears:

Online bank transfer through Faster Payments, using the “Approve a payment through your bank” option in your HMRC online account. Funds typically arrive the same or next working day.
CHAPS, which processes same-day if you initiate the transfer within your bank’s cut-off time. Useful for deadline-day payments.
Bacs, which takes three working days to clear, so send it well before the deadline.⁴
One-off Direct Debit through your HMRC online account. Allow five working days the first time, or three working days if you’ve used the same bank details before.⁵

If you’d rather spread the cost throughout the year instead of facing two lump sums, HMRC’s Budget Payment Plan lets you make weekly or monthly Direct Debit payments toward your next Self Assessment bill. Money paid in gets credited against your upcoming bill, so the January and July instalments are smaller when they arrive.⁵

What Happens If You Pay Late

Missing a payment on account deadline triggers interest immediately. HMRC’s late payment interest rate is the Bank of England base rate plus 4%, which currently works out to 7.75% per year.³ Interest accrues daily from the original due date until HMRC receives the money, regardless of any payment arrangement you’ve set up.

Penalties work differently depending on which payment you’ve missed. For balancing payments — the final settlement after your tax return is filed — HMRC charges a 5% surcharge on tax still unpaid after 30 days, with further 5% charges at six months and twelve months.⁶ Those stack, so a bill that’s a year overdue attracts 15% in penalties on top of interest.

For payments on account, the picture is more forgiving. Under the Making Tax Digital penalty regime taking effect from April 2026, late payment penalties explicitly do not apply to payments on account.⁷ You still owe interest on late instalments, but you won’t face the percentage surcharges that apply to balancing payments. Interest at 7.75% on a large tax bill still adds up quickly, so the absence of formal penalties isn’t a reason to treat the deadlines casually.

If You Can’t Afford to Pay

HMRC’s Time to Pay service lets you spread a Self Assessment debt over monthly instalments. For tax debts up to £30,000 you can set up a payment plan entirely online without speaking to anyone, as long as you’ve already filed your return. Debts over £30,000 or those needing a longer repayment window require a phone call to negotiate terms.⁸

One point people misunderstand: Time to Pay prevents penalties from being charged while you stick to the agreed schedule, but interest continues to accrue from the original due date until each instalment is received. It buys breathing room, not a discount. Setting up the arrangement before the deadline passes matters, because penalties already incurred before you agree a plan won’t be reversed.

What Changes Under Making Tax Digital

From 6 April 2026, self-employed individuals and landlords with gross income over £50,000 must begin using Making Tax Digital for Income Tax, submitting quarterly digital updates to HMRC in place of the single annual return.⁹ The threshold drops to £30,000 from April 2027.

The payments on account structure itself doesn’t change. You’ll still make two advance payments based on your prior year’s liability. What changes is the penalty framework for balancing payments: the flat 5% surcharges are replaced by 3% of the tax owed at day 15, rising to 6% if still unpaid at day 30, plus daily interest at 10% per year from day 31 onward. Those new penalties apply only to balancing payments and amended assessments, not to payments on account.⁷ In the first year of the new regime, HMRC allows 30 days from the due date to pay or set up a payment plan before penalties apply.

1
GOV.UK. Understand Your Self Assessment Tax Bill – Payments on Account
2
GOV.UK. Claim to Reduce Payments on Account
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GOV.UK. Rates and Allowances: HMRC Interest Rates for Late and Early Payments
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GOV.UK. Pay Your Self Assessment Tax Bill – Make an Online or Telephone Bank Transfer
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GOV.UK. Pay Your Self Assessment Tax Bill – Direct Debit
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GOV.UK. Self Assessment Tax Returns – Penalties
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GOV.UK. Penalties for Making Tax Digital for Income Tax
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GOV.UK. HMRC Offers Time to Help Pay Your Tax Bill
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GOV.UK. Find Out If and When You Need to Use Making Tax Digital for Income Tax