How to Reduce Payments on Account When Profits Fall 2026/27

Payments on account are one of the biggest cash-flow shocks for the newly self-employed, and a real headache when income falls. If your profits have dropped, you may be paying HMRC twice as much as you need to. Here is how the system works and how to reduce your payments safely in 2026/27.

How payments on account work

After your first full year of self-employment, HMRC starts asking for advance payments towards the next year's tax. You owe payments on account if both apply:

• Your income tax and Class 4 National Insurance for the year were more than GBP 1,000.
• Less than 80% of your tax was collected at source, for example through PAYE.

Each payment on account equals half of your previous year's bill. They are due on 31 January and 31 July. So when you file, you pay last year's balance plus the first instalment towards next year, which is why the January bill can feel brutal.

Why they can be too high

Payments on account assume next year will look like last year. If your income has fallen, perhaps you lost a client, took time off, or the market softened, the standard payments will overshoot your real liability. You would eventually get the overpayment back, but only after you file, which could be many months of your cash tied up with HMRC.

Making a claim to reduce

You do not have to accept the default amount. You can make a claim to reduce your payments on account if you genuinely expect a lower bill. You do this:

• Through your HMRC online Self Assessment account, by entering your reduced estimate.
• Or by submitting form SA303.

You estimate your expected income tax and Class 4 NI for the year, and HMRC cuts both instalments to match. You can reduce them right down to nil if you expect to owe nothing.

Worked example: a freelancer whose income halved

Ravi paid GBP 9,200 in tax and Class 4 NI for 2025/26. His payments on account for 2026/27 are set at GBP 4,600 each, due in January and July, GBP 9,200 in total.

But a major client has ended and he expects his 2026/27 profits to roughly halve. He estimates his real liability will be about GBP 4,400. He makes a claim to reduce, setting each payment to GBP 2,200.

• Default payments: GBP 4,600 x 2 = GBP 9,200.
• Reduced payments: GBP 2,200 x 2 = GBP 4,400.
• Cash kept in his business in the short term: about GBP 4,800.

If his actual liability turns out close to GBP 4,400, the reduction was spot on and he avoided lending HMRC nearly GBP 5,000.

The interest trap

The risk is reducing too far. If you cut your payments below what you actually end up owing, HMRC charges interest on the shortfall, backdated to the original 31 January and 31 July due dates. So an over-optimistic reduction can cost you.

To stay safe:

• Base your estimate on real, up-to-date figures, not hope.
• Leave a margin if your income is uncertain.
• Review again before the July payment if things have changed.
• Keep a note of how you calculated the estimate, in case HMRC asks.

Quick checklist

• Check whether your income has genuinely fallen versus last year.
• Estimate your expected income tax plus Class 4 NI for the year.
• Reduce both instalments through your online account or SA303.
• Do not reduce below a realistic figure, or interest applies.
• Revisit the estimate before the July payment.

To estimate your likely income tax and Class 4 National Insurance for the year before you make a claim, use the calchub.uk self-employed tax calculator, and follow the claim to reduce payments on account guidance on gov.uk.