Payments on Account: What They Are and How to Reduce Them

What Are Payments on Account?

Payments on account are advance payments towards your next year's Self Assessment tax bill. Rather than waiting until January of the following year to collect all the tax you owe, HMRC spreads the collection across two interim payments — in January and July — each equal to half of your previous year's tax liability.

The system exists because HMRC wants to avoid large tax debts building up over a full year before collection. For employees whose income tax is deducted via PAYE throughout the year, this is not an issue — PAYE is already a "pay as you go" system. But for self-employed people, landlords, and others who pay tax via Self Assessment, payments on account serve a similar function.

When Do Payments on Account Apply?

The payments on account system kicks in automatically when two conditions are met:

1. Your Self Assessment tax bill is £1,000 or more (this figure refers to tax that is not already deducted at source — i.e., not covered by PAYE)
2. Less than 80% of your total tax for the year has been collected through PAYE or other deductions at source

If your bill is below £1,000, or if most of your tax is collected via PAYE, you pay the full balance on 31 January with no advance payments required.

What Is Included in Payments on Account?

Payments on account cover:

• Income tax
• Class 4 National Insurance (on self-employment profits)

They do not include:

• Capital gains tax
• Student loan repayments
• Class 2 National Insurance (now collected separately via Self Assessment)
• High Income Child Benefit Charge

These items are paid as part of the January balancing payment only.

The Payment Schedule

Understanding the full payment cycle is crucial, particularly for people in their first or second year of Self Assessment.

Year 1 of Self Assessment (the "double payment" year)

Suppose you start self-employment in 2024/25 and your tax bill for that year is £6,000.

On 31 January 2026, you must pay:

• The full balancing payment for 2024/25: £6,000
• The first payment on account for 2025/26: £3,000 (50% of £6,000)
• Total due in one day: £9,000

On 31 July 2026, you pay:

• The second payment on account for 2025/26: £3,000

On 31 January 2027, you pay:

• The balancing payment for 2025/26 (actual bill minus the £6,000 already paid via POAs)

This "double payment" in the first January is one of the most common financial shocks for new self-employed people. Many accountants and financial advisers recommend setting aside 25–30% of net profit each month to build the cash reserve needed for these moments.

The Standard Ongoing Cycle

Once you are established in Self Assessment, the rhythm is:

The amounts vary year to year as your income changes, but the structure remains constant.

How Payments on Account Are Calculated

HMRC calculates your payments on account automatically based on your previous year's tax return. The calculation is simple:

Each payment on account = 50% × (prior year income tax + prior year Class 4 NI)

Example: In 2024/25 your combined income tax and Class 4 NI bill was £8,400.

• 1st payment on account for 2025/26: £4,200 (due 31 January 2026)
• 2nd payment on account for 2025/26: £4,200 (due 31 July 2026)
• Balancing payment for 2025/26 due 31 January 2027 (actual bill minus £8,400 already paid)

If your 2025/26 actual bill is £9,600, the balancing payment is £9,600 − £8,400 = £1,200, plus the first POA for 2026/27 (£4,800).

If your bill is lower than expected — say £7,000 — you will receive a refund of the £1,400 overpaid via POAs, and future POAs will be calculated on the lower base.

The Cash Flow Problem

Payments on account can create significant cash flow pressure, particularly when your income is volatile. The most common problem scenarios are:

Rising Income Year-on-Year

If your income jumps from £40,000 to £60,000 in a single year, your POAs for the following year (calculated on the £60,000 year's tax) will be much higher — potentially consuming a large proportion of your available cash before you even know what your actual liability will be.

Seasonal Income

Consultants, contractors, and seasonal businesses often earn the bulk of their income in one part of the year. Meeting a large July POA after a lean first half of the year can be challenging even when annual income is healthy.

Year of Reduced Income

Conversely, if your income drops significantly — due to illness, redundancy from a contract, or a business downturn — you may find yourself paying large POAs based on a bumper prior year, when in reality your current year's tax bill will be far lower. This is precisely the scenario where applying to reduce your POAs makes sense.

How to Reduce Your Payments on Account

If you believe your current year's tax bill will be lower than the prior year's (which the POAs are based on), you can apply to pay reduced amounts. This is entirely legal and HMRC-approved — provided your estimate is reasonable and made in good faith.

Method 1: Via Your Self Assessment Return

When completing your online or paper Self Assessment return, there is a specific section where you can claim lower payments on account. You enter your estimated current year tax liability, and HMRC adjusts the POAs accordingly.

Method 2: Form SA303

Form SA303 is the standalone application form for reducing payments on account. It can be submitted:

• Online via your Government Gateway account (search for "reduce payment on account")
• By post to HMRC Self Assessment, HM Revenue and Customs, BX9 1AS

The form asks for:

• Your UTR (Unique Taxpayer Reference)
• The tax year for which you want the reduction
• Your estimated liability for the current year
• A brief explanation of why it is lower

Valid Reasons for Reduction

HMRC will accept reductions where you can show:

• Your trading income has fallen (e.g., fewer clients, closure of part of the business)
• You have increased pension contributions that will reduce your taxable income
• You have additional allowable expenses in the current year
• You have ceased trading or are on a career break
• You have other reliefs or losses available this year that were not applicable last year

You do not need documentary evidence to submit the SA303, but you should retain a record of your reasoning in case HMRC queries it later.

When Reductions Go Wrong: Interest Charges

If you reduce your payments on account and your actual bill turns out to be higher than your estimate, HMRC will charge interest on the difference — calculated as if you should have paid the correct amount from the original payment due dates.

Example: You estimated your 2025/26 tax would be £5,000 and paid two POAs of £2,500 each (January and July 2026). Your actual 2025/26 bill is £8,000. The shortfall is £3,000.

HMRC charges interest on:

• £1,500 from 1 February 2026 (the underpaid first POA)
• £1,500 from 1 August 2026 (the underpaid second POA)

At 6.75% per annum (approximate current rate), interest on £1,500 from February to January is approximately £101. On the second underpaid POA: approximately £76. Total interest: around £177 — modest but real.

The key rule: reducing POAs is a legitimate cash flow tool, but you should base your estimate on a realistic assessment of your income. Deliberately understating your estimate to improve cash flow is not advisable — HMRC will correct it and charge interest.

No Penalty for Honest Reduction

Importantly, there is no fixed penalty for having reduced your POAs if it turns out your estimate was wrong. Only interest is charged on the shortfall. This is genuinely different from the late filing and late payment penalty regime, and means that a conservative reduction (to a figure you are fairly confident you will not undershoot) carries limited downside risk.

When to Stop Making Payments on Account

Payments on account cease automatically in years where your tax bill falls below £1,000, or where 80% or more of your tax is collected at source (e.g., if you return to full-time employment under PAYE and no longer have significant untaxed income).

If you stop being self-employed mid-year, notify HMRC promptly via a SA303 to cancel the July POA. HMRC will not cancel it automatically unless you file a return showing a nil or low liability.

Budgeting for Payments on Account

The best approach for managing POAs is to budget proactively throughout the year:

1. Set aside 25–30% of net profit into a separate savings account as you earn it — this covers both the balancing payment and the first POA
2. Note your key dates — 31 January and 31 July — and treat them as hard financial deadlines
3. Review your income mid-year — if it is tracking significantly below the prior year, submit an SA303 to reduce July's POA before it falls due
4. Talk to your accountant in October or November to get a reliable estimate of the year's liability before the January crunch

Summary

Payments on account are one of the most misunderstood aspects of Self Assessment — particularly for those new to self-employment. The "double payment" shock in January of your second year is a rite of passage, but one that is entirely manageable with forward planning. If your income drops, the SA303 mechanism gives you a straightforward route to reducing your POAs. The risk is modest — only interest (not penalties) applies if your estimate proves too optimistic. With good record-keeping and a habit of monthly tax provisioning, payments on account need not be a source of financial stress.