You filed your first Self Assessment return, expected to owe one year's tax, and HMRC sent you a bill for roughly one and a half times that. Nothing's gone wrong. You've just met payments on account for the first time, and almost nobody is warned about them in advance.
In this guide we'll explain what payments on account are, why your January bill jumps to 150% of the tax you actually owe, and how to work out exactly what you'll pay. We'll walk through an illustrative example with current figures, and show you when you can safely ask HMRC to reduce them.
It's written for sole traders and the self-employed filing through Self Assessment. If that's you, this is the one tax surprise worth understanding before it lands.
What are payments on account?
Payments on account are advance payments towards your next Self Assessment tax bill. HMRC asks for them so you're paying tax closer to the point you earn the income, rather than up to a year later.
There are two of them, and in HMRC's words, "each payment is half of the tax you owed last year." HMRC assumes next year's bill will look like last year's, so it splits that estimate into two equal instalments.
One important detail catches people out: payments on account cover your income tax and your Class 4 National Insurance, but they do not include Capital Gains Tax or student loan repayments. Those are always settled in the balancing payment instead.
Why is my first Self Assessment bill so much bigger?
Because in your first year of payments on account, three things land on the same date.
On 31 January you pay:
- the full tax bill for the year that's just ended (100%), and
- your first payment on account towards the current year (50%).
That's where the "150%" comes from. You're settling one year and pre-paying half of the next, all at once. Then on 31 July you pay the second payment on account (another 50%).
It feels like a penalty, but it isn't. You're not paying extra tax overall. You're paying part of next year's tax early. The pain is purely about timing and cash flow, and it's worst the very first time it happens because there's nothing already paid in advance to offset it.
Worked example: where does the 150% come from?
Illustrative example. Sam is a self-employed graphic designer (a sole trader). In 2024/25, Sam made a taxable profit of £45,000. Sam has no other income and isn't in Scotland.
First, Sam's tax bill for 2024/25. Using the 2025/26 thresholds, which also apply to the relevant bands here, the personal allowance is £12,570 and the basic rate is 20% on taxable income up to £37,700.
| Item | Calculation | Amount |
|---|---|---|
| Profit | £45,000 | |
| Less personal allowance | (£12,570) | |
| Taxable profit | £32,430 | |
| Income tax | £32,430 at 20% | £6,486.00 |
| Class 4 National Insurance | (£45,000 − £12,570) at 6% | £1,945.80 |
| Total tax owed for the year | £8,431.80 |
The income tax sits entirely within the basic rate band, because taxable profit of £32,430 is below the £37,700 band limit. Class 4 NIC is charged at 6% on profits between the Lower Profits Limit of £12,570 and the Upper Profits Limit of £50,270 for 2025/26, and Sam's profit falls inside that range.
Now the payments on account. Because Sam owes more than £1,000 and pays almost none of it through a tax code, HMRC asks for two payments on account, each half of the £8,431.80 bill, so £4,215.90 each.
Here's what actually lands on each date:
| Date | What's due | Amount |
|---|---|---|
| 31 January 2026 | 2024/25 balancing payment | £8,431.80 |
| 31 January 2026 | First payment on account for 2025/26 | £4,215.90 |
| 31 January 2026 total | £12,647.70 | |
| 31 July 2026 | Second payment on account for 2025/26 | £4,215.90 |
So Sam's January bill is £12,647.70, which is exactly 150% of the £8,431.80 actually owed for the year. The extra £4,215.90 isn't a new tax. It's the first half of next year's bill, paid early.
When do I have to make payments on account?
You have to make them once your Self Assessment bill crosses a threshold. HMRC sets out two get-out conditions. You do not need to make payments on account if either of these applies:
- "the amount of tax you owed last year was less than £1,000", or
- "last year you paid more than 80% of the tax you owed... outside of Self Assessment (for example through your tax code or because your bank had already deducted interest on your savings)."
So a hobby-scale side business that owes under £1,000 won't trigger them. Neither will someone who's mostly taxed through PAYE with only a small amount of extra income. But a full-time sole trader with a few thousand pounds of tax to pay almost always will.
When are payments on account due?
There are two fixed dates each year, and they don't move:
| Payment | Due date | Amount |
|---|---|---|
| First payment on account | 31 January (with your balancing payment) | 50% of last year's tax |
| Second payment on account | 31 July | 50% of last year's tax |
The 31 January date is the same midnight deadline as your balancing payment and your online filing deadline, which is why so much hits at once. Miss either payment on account and HMRC charges interest from the due date until you pay.
What is a balancing payment?
The balancing payment is the figure that squares everything up. In HMRC's words, it's worked out by "deducting the payments on account you've made from the total tax you owe", and it's due by midnight on 31 January.
In your first year there's nothing to deduct yet, so the balancing payment is your whole bill. From year two onwards, the two payments on account you've already made are knocked off, and the balancing payment is just the difference, plus the first payment on account for the new year.
If your income went up, the balancing payment tops up the gap. If it went down, you may have overpaid and be due a refund or a credit against the next instalment.
Can I reduce my payments on account?
Yes, but only if you genuinely expect to owe less. Payments on account are based on last year's profit, so if you know this year will be lower (you've lost a major client, gone part-time, or had a one-off spike last year), you can ask HMRC to reduce them.
You do this with form SA303, or through your online Self Assessment account. You can lower both payments to a figure you think is realistic, or to nil.
Here's the catch worth taking seriously. If you reduce them too far and your actual bill turns out higher, HMRC charges interest on the shortfall, backdated to the original due dates. So reducing payments on account is a forecasting decision, not a way to defer tax. Reduce them because your income has genuinely fallen, not just to ease this month's cash flow.
If you're unsure where to set them, this is exactly the sort of judgement a Self Assessment accountant makes routinely. Our Self Assessment service includes reviewing whether a reduction is justified and filing it correctly.
What happens in year two and beyond?
The 150% shock is a one-off. After your first year, the rhythm settles.
Each 31 January from then on, you'll pay any balancing payment for the year just gone (often small, because two instalments are already paid) plus the first payment on account for the new year. Each 31 July you'll pay the second instalment.
If your profits stay broadly flat, the two payments on account roughly cover your bill, and the January balancing payment becomes modest. The big jump only happens once, in the year you first cross the threshold. Forewarned, you can set the money aside through the year and treat 31 January as a known event rather than a nasty surprise.
A useful habit: put your tax aside monthly. You can estimate the right percentage with our self-employed tax calculator, then move that share into a separate account every time you're paid.
Frequently asked questions
Do payments on account mean I'm paying tax twice?
No. You're paying the same tax, just earlier. The payments on account are credited against next year's bill, so over time you pay exactly what you owe. The first year only feels like double because you settle one year and pre-pay half the next on the same day.
Are payments on account based on my profit or my tax bill?
On your tax bill. Each instalment is half of the total income tax and Class 4 National Insurance you owed under Self Assessment last year. It is not a percentage of your profit or turnover.
What if my income drops sharply this year?
You can apply to reduce your payments on account using form SA303 or your online account. Just be accurate. If you cut them below what you actually end up owing, HMRC charges interest on the difference from the original due dates.
Can I spread payments on account if I can't pay in one go?
If you can't pay on time, you can ask HMRC about a Time to Pay arrangement to spread the cost. Interest still applies, but it can prevent a missed-payment penalty. It's best to arrange this before the deadline, not after.
Do payments on account include my student loan or Capital Gains Tax?
No. Payments on account only cover income tax and Class 4 National Insurance. Student loan repayments and any Capital Gains Tax are collected through the balancing payment on 31 January instead.
Get help with your tax return →
Talk to a Zmartly accountant before your first 31 January
If you're staring at a 150% bill, or you want to know whether you can safely reduce your payments on account, we can run the numbers with you. Book a free 20-minute call with a Zmartly accountant and we'll explain exactly what you owe and when. See our Self Assessment service or, if you want a wider tax review, our tax advisory service.
We work with sole traders across the UK, so first-year payments on account are familiar territory for us.
