Payments on Account in Your First Year Self-Employed 2026/27

The first-year surprise

Many people going self-employed budget for the tax on their profit and then get a shock when the 31 January demand arrives far larger than expected. The reason is payments on account, a system that asks you to pay part of next year's tax in advance.

It catches first-timers because in year one you settle the year just ended and start prepaying the next year at the same time. There is no gentle introduction: HMRC expects you to know about this system before the bill arrives.

How payments on account work

Once your Self Assessment income tax and Class 4 National Insurance for a year exceed £1,000, HMRC normally asks for two payments on account towards the following year. Each is half of your latest liability. They fall due on 31 January and 31 July.

You do not include any Class 2 NI, capital gains tax, student loan repayments, or the High Income Child Benefit Charge in the payments on account calculation. Those are settled separately through the balancing payment on 31 January.

The key principle: the amount of each payment on account is based on the previous year's liability, not what you think you will owe in the coming year. HMRC uses the most recent known figure as a proxy.

The 2026/27 tax rates that drive the calculation

Understanding your payments on account starts with knowing the rates used to calculate your underlying liability. For 2026/27 these are unchanged from 2025/26:

The Personal Allowance and Class 4 lower-profit limit of £12,570 have been frozen at this level through to April 2028 under the government's threshold freeze, meaning fiscal drag continues to pull more self-employed income into tax with each passing year.

Worked example 1: a basic-rate freelancer

Suppose your first full year of trading is 2026/27 and your profit is £32,000. After deducting the £12,570 Personal Allowance, your taxable income is £19,430.

Income tax: £19,430 at 20% = £3,886
Class 4 NI: (£32,000 minus £12,570) = £19,430 at 6% = £1,166
Class 2 NI: £3.50 x 52 weeks = £182 (not included in payments on account)
Total income tax + Class 4: £5,052

Payments on account are based on the £5,052 figure (income tax plus Class 4 only):

• 31 January 2028: £5,052 balancing payment for 2026/27, plus first payment on account of £2,526 (half of £5,052) towards 2027/28. Plus Class 2 NI of £182. Total due: £7,760
• 31 July 2028: Second payment on account of £2,526 towards 2027/28.

Your 31 January 2028 payment is roughly 153% of your actual 2026/27 tax and NI bill. The second year's January bill, assuming similar profits, will be much smaller because you have already made the two advance payments.

Worked example 2: a higher-rate contractor

Now suppose you earn £80,000 profit in your first full year of self-employment in 2026/27.

Income tax:

• Basic rate: (£50,270 minus £12,570) = £37,700 at 20% = £7,540
• Higher rate: (£80,000 minus £50,270) = £29,730 at 40% = £11,892
• Total income tax: £19,432

Class 4 NI:

• Main rate: (£50,270 minus £12,570) = £37,700 at 6% = £2,262
• Upper rate: (£80,000 minus £50,270) = £29,730 at 2% = £595
• Total Class 4: £2,857

Total income tax + Class 4: £22,289
Class 2 NI (settled separately): £182

Payments on account are based on £22,289:

• 31 January 2028: £22,289 balancing payment for 2026/27, plus first payment on account of £11,145 (half of £22,289). Plus Class 2 of £182. Total due: £33,616
• 31 July 2028: Second payment on account of £11,144.

For a higher earner, the cash-flow impact is severe. Setting aside the right percentage from day one is not optional — it is essential.

Use the income tax calculator at calchub.uk to model your own figures before the end of the tax year.

Worked example 3: staying under the £1,000 threshold

Not everyone triggers payments on account. If your combined income tax and Class 4 NI is below £1,000, you are exempt. Consider a part-time sole trader with £15,000 profit:

Income tax: (£15,000 minus £12,570) = £2,430 at 20% = £486
Class 4 NI: £2,430 at 6% = £146
Total income tax + Class 4: £632

Because £632 is below the £1,000 threshold, this person owes nothing on account. Their total January bill is £632 plus Class 2 NI of £182 = £814, all settled on 31 January 2028. No July payment. No advance payments the following year (unless profits rise).

This illustrates why the payments on account system can feel invisible for the first year or two of modest self-employment, then suddenly arrive as a shock when income grows.

Year-by-year comparison: what the bills actually look like

Using the basic-rate freelancer from example 1 (£5,052 combined liability each year, assumed stable income):

After the first January, the annual total stays roughly the same but is spread across two dates. The first January is consistently the hardest.

How to prepare financially

Set money aside from the first invoice. Do not wait until January to find the funds. For a basic-rate taxpayer, reserving 28 to 32% of each payment received typically covers income tax, Class 4 NI, and the first-year advance payments. For a higher-rate taxpayer, that figure rises to 35 to 45% depending on profit level.

Open a separate savings account for tax. Keeping HMRC's money in a dedicated account removes the temptation to spend it and earns interest in the meantime. Many self-employed people use a high-interest easy-access account for exactly this purpose.

File your return early. HMRC opens Self Assessment filing for the previous year from 6 April. You do not have to wait until January. Filing in May or June gives you eight months of advance notice of your exact bill — time to save any shortfall.

Build a tax calendar. Add 31 January and 31 July to your business calendar every year, with reminder alerts. Missing either date results in immediate interest at 7.25% per annum (2026/27 rate), calculated daily.

Use a cash-flow model. The self-employed tax calculator at calchub.uk lets you enter your expected profit and see your likely payments on account before you file.

When payments on account do not apply

You will not have to make them if either of the following is true:

• Your previous Self Assessment liability (income tax plus Class 4 NI only) was below £1,000.
• More than 80% of your total tax for the year was already collected at source — for example, if you also have PAYE employment income and your employer deducts enough tax to cover more than 80% of your overall Self Assessment liability.

If you stop being self-employed, your liability in the final year may fall below £1,000, ending the payments on account cycle automatically.

Reducing your payments

If you genuinely expect your profits to be lower in the coming year, you can apply to reduce your payments on account. You do this through your HMRC online tax account or by filing form SA303.

Be careful: if you reduce your payments below what you actually owe, HMRC charges interest on the underpaid amount from the original due dates. As of 2026/27, that interest rate is 7.25% per annum. For a £5,000 shortfall over twelve months, the interest cost is around £362. Base any reduction on a realistic forecast — actual bookkeeping figures, not optimism.

If your income has genuinely fallen significantly, reducing your payments on account is the right move and saves real money. For a step-by-step guide, see how to reduce payments on account when profits fall.

National Insurance: what counts and what does not

A common source of confusion is which National Insurance contributions go into the payments on account calculation. The rule is straightforward:

• Class 4 NI is included. It runs alongside income tax in your Self Assessment return and forms part of the liability figure HMRC uses to calculate payments on account.
• Class 2 NI is excluded. It is collected via your balancing payment on 31 January, not through payments on account. For 2026/27 it is £3.50 per week (£182 per year) for profits above £12,570.
• Class 1 NI from PAYE employment is excluded. It is deducted by your employer before you receive pay and plays no part in Self Assessment payments on account.

For a detailed breakdown of how NI is calculated alongside income tax, the National Insurance calculator at calchub.uk covers all classes and contribution rates for 2026/27.

Late payment interest and penalties

HMRC charges interest on payments on account that are late or have been reduced too far. The current late payment interest rate for 2026/27 is 7.25% per annum, applied from the day after the deadline. This is calculated daily and added automatically to your tax account.

There are no fixed-penalty surcharges specifically for late payments on account (unlike the 5% surcharge that can apply to the balancing payment after 30 days), but the interest accumulates quickly on large amounts. A £10,000 late payment on account left unpaid for 60 days costs approximately £120 in interest alone.

HMRC's Budget Payment Plan allows you to make voluntary advance payments throughout the year, which can reduce or eliminate the risk of interest. These are set up through your HMRC online account.

The bottom line

Payments on account are not an extra tax, just an acceleration of it. The sting is the first 31 January, when you pay one and a half years' worth at once. Once you understand the mechanism, you can plan for it precisely rather than being caught out.

The three practical steps that prevent most first-year surprises are: reserve a realistic percentage from every payment received, file your return as early as possible after 5 April, and diarise both payment dates before the year starts.

Use the self-employed tax calculator at calchub.uk to estimate your income tax and Class 4 NI liability and model what your first January bill will look like. Then confirm the payment dates, the £1,000 threshold, and the reduction rules at gov.uk Self Assessment.