Payments on Account vs Balancing Payment: Why Your January Tax Bill Is Bigger Than You Think (2026/27)
The difference between Self Assessment payments on account and the balancing payment — and why your first 31 January bill often includes three separate amounts added together, in 2026/27.
Two different things due on the same date
Self Assessment taxpayers frequently confuse payments on account with the balancing payment, largely because both can be due on the same day — 31 January. They are calculated completely differently and serve different purposes.
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Open Self-Employed Tax calculator| Concept | What it is | When calculated |
|---|---|---|
| Payment on account | Advance instalment, 50% of last year's total liability | Automatically, based on prior year |
| Balancing payment | Top-up (or refund) once this year's actual liability is known | Only after you file the return for that year |
Worked example: why year one feels so painful
Suppose someone starts self-employment and their first tax return (for the 2025/26 tax year) shows a total liability of £6,000 (income tax plus Class 4 NI). Because this is their first return, no payments on account will have been made in advance for 2025/26 — so the full £6,000 is due as a balancing payment.
At the same time, HMRC assumes 2026/27 will look similar and requires two payments on account for that year, each 50% of the £6,000 figure:
| Amount due 31 January 2027 | Value |
|---|---|
| Balancing payment for 2025/26 | £6,000 |
| First payment on account for 2026/27 (50%) | £3,000 |
| Total due 31 January 2027 | £9,000 |
A second payment on account of £3,000 then falls due on 31 July 2027, bringing the total tax paid across the year to £12,000 — effectively 200% of the actual 2025/26 liability paid within 18 months, purely because of the timing mechanics of the system, not because more tax is actually owed.
What happens in year two if profits stay flat
If profits and tax liability for 2026/27 also come out at £6,000, the balancing payment due 31 January 2028 is:
Balancing payment = £6,000 (actual 2026/27 liability) − £6,000 (payments on account already made for 2026/27) = £0
At this point the cycle has "caught up" — from year two onward, provided profits stay broadly stable, the taxpayer only pays two payments on account of £3,000 each throughout the year, with the balancing payment settling at or near zero.
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Open Sole Trader Pay calculatorWhat happens if profits fall (or rise)
The balancing payment mechanism reconciles the difference in either direction:
| Scenario | Payments on account made | Actual liability | Balancing payment |
|---|---|---|---|
| Profits fall to £4,000 total liability | £6,000 (2 × £3,000) | £4,000 | −£2,000 (refund/credit) |
| Profits stay at £6,000 | £6,000 | £6,000 | £0 |
| Profits rise to £9,000 total liability | £6,000 | £9,000 | +£3,000 (extra owed) |
A falling-profit scenario produces a negative balancing payment — HMRC either refunds the difference directly or offsets it against the next payment on account falling due, reducing the cash needed on 31 July.
Late payment: interest and penalties
If the combined balancing payment and payment on account are not paid in full by 31 January, HMRC charges late-payment interest from the due date, calculated daily on the outstanding balance. If the amount remains unpaid 30 days after the due date, a late-payment penalty is also charged (typically a percentage of the unpaid tax), with further penalties at 6 and 12 months if the debt remains outstanding. These penalties and interest are entirely separate from — and added on top of — the underlying balancing payment and payment on account themselves.
Practical cash-flow planning
Because the combined bill in a taxpayer's early years (or any year following a profit increase) can be substantially larger than a single year's liability, most experienced self-employed taxpayers set aside a running percentage of every invoice as it is paid, in a separate savings account, rather than waiting to calculate the full liability at year end. As a rough guide, setting aside enough to cover roughly one and a half times the expected annual liability in your first year — to account for the balancing payment plus the first payment on account arriving together — avoids the most common cash-flow shock new Self Assessment filers experience.
Frequently asked questions
What is the difference between a payment on account and a balancing payment?
Payments on account are advance instalments towards the current tax year's bill, each equal to half of last year's total liability, paid on 31 January and 31 July. The balancing payment is a top-up (or refund) calculated once your actual tax return for the year is filed, covering the gap between what you actually owed and what your two payments on account already covered.
Why is my first January Self Assessment bill so much bigger than expected?
Your first bill after starting Self Assessment often includes three amounts added together: the balancing payment for the year just ended, plus the first payment on account for the following year (50% of the same liability), sometimes alongside a second payment on account already due. This effectively means paying one and a half years of tax in a single date if it's your first year in the system.
How is the balancing payment calculated?
Balancing payment = total tax and Class 4 National Insurance due for the tax year, minus the two payments on account already made for that year. If the payments on account were higher than the actual liability (because your income fell), the balancing payment can be negative, meaning HMRC owes you a refund or credit instead.
When is the balancing payment due?
The balancing payment for a tax year is due on the same date as the first payment on account for the following year — 31 January after the end of the tax year in question. For the 2025/26 tax year, this is 31 January 2027.
Can the balancing payment be a refund instead of an extra payment?
Yes. If your payments on account (based on the previous year's higher liability) turn out to exceed your actual tax bill for the year, the balancing calculation produces a negative figure, and HMRC will refund the difference or offset it against your next payment on account, rather than asking for more money.
Do I pay Class 4 National Insurance as part of the balancing payment?
Yes. The balancing payment reconciles your total Self Assessment liability, which includes both income tax and Class 4 National Insurance on self-employment profits, alongside any Class 2 NI, student loan repayments and High Income Child Benefit Charge included in your return for that year.
What happens if I can't pay the combined bill on 31 January?
You can set up a Time to Pay arrangement with HMRC to spread the amount over instalments, provided you contact them promptly, ideally before the deadline. Interest continues to accrue on the outstanding balance during a Time to Pay arrangement, and missing agreed instalments can lead to the arrangement being cancelled and penalties applied.
Does the balancing payment include any penalties or is it just tax owed?
The balancing payment itself is just the reconciled tax and NI liability — it does not include penalties. However, if the balancing payment (or an earlier payment on account) is paid late, separate late-payment interest and, after 30 days, a late-payment penalty can be charged in addition to the tax itself.
How can I avoid being caught out by the combined bill in my first year?
Set aside roughly the total expected tax liability for the current year, not just what was actually due on account, since the first January payment typically requires the balancing payment plus a fresh payment on account — commonly around 150% of a single year's tax bill in cash terms. Many self-employed people use a dedicated savings account and transfer a percentage of every invoice as it's paid, precisely to avoid this shock.
If I stop being self-employed, do I still owe a final balancing payment?
Yes. Even after ceasing self-employment, you must still file a final Self Assessment return covering your last trading period and pay any balancing payment due, though HMRC should stop generating further payments on account once your circumstances are updated, and any payments on account already made for a year you didn't trade in full can be reduced or reclaimed.
Try the calculators
Self-Employed Tax Calculator
Calculate income tax, Class 2 and Class 4 National Insurance for self-employed and sole traders for 2025/26.
Sole Trader Take-Home Pay Calculator 2026/27
Calculate your net take-home pay as a UK sole trader after Income Tax and Class 4 National Insurance. Compare with PAYE employment.
Related reading
Self Assessment Payments on Account: How and When You Can Reduce Them (2026/27)
How Self Assessment payments on account work in 2026/27, when you can legitimately reduce them, and the penalty risk if you reduce them by too much.
How HMRC Calculates Your Tax Bill on Self Assessment (Part 5)
How HMRC calculates your self assessment tax bill: income tax at marginal rates, National Insurance for the self-employed, payments on account explained, and how to reduce your July bill.
UK Self Assessment From Scratch — Part 8: After You File
What happens after you submit your Self Assessment return — refunds, balancing payments, amendments, HMRC enquiries, the SA302 for mortgages, and the 5-year record-keeping rule