Payments on Account for the Newly Self-Employed: What to Expect in Year One and Two

Why Year One Feels Deceptively Simple

When you first register as self-employed, your first Self Assessment tax return only requires you to pay your actual tax liability for that specific tax year — there's no prior year for HMRC to base an advance payment on, so no payments on account are due alongside it.

Example: Maya starts self-employment in the 2024/25 tax year. Her first Self Assessment return (filed by 31 January 2026) shows a liability of £4,000. She pays exactly £4,000 by 31 January 2026 — nothing more.

This straightforward first bill often leads newly self-employed people to assume their tax bill will be roughly the same, or grow only in line with their earnings, each year. The second year's bill breaks that assumption.

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The Year-Two "Shock"

Because Maya's year one liability (£4,000) was over £1,000, and assuming less than 80% of her tax was collected at source, she now falls into the payments-on-account system. Her second Self Assessment bill (due 31 January 2027, covering the 2025/26 tax year) includes:

Worked example: If Maya's profits grew and her 2025/26 liability is £5,000:

Maya's January 2027 bill (£7,500) is nearly double her year-one bill (£4,000) — not because her profits doubled, but because she's now paying her current year's liability and prepaying half of next year's estimated liability at the same time.

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Why This Structure Exists

Payments on account exist to bring self-employed taxpayers closer to the "pay as you earn" cash-flow pattern that PAYE employees experience automatically through payroll deductions — rather than allowing a full year (or more) of tax to build up before a single payment. Without this system, HMRC would be extending, in effect, an interest-free credit period to self-employed taxpayers that PAYE employees don't get.

The trade-off is that the transition into the system — specifically the second Self Assessment bill — creates a one-off jump that can be a genuine cash-flow challenge if not anticipated.

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How to Budget for It From Day One

The most effective way to avoid the year-two shock being a genuine problem is to plan for it from the start of self-employment, not just from the start of year two:

Because the year-two bill effectively covers 1.5 years' worth of tax liability crystallising at once, a rough rule of thumb many newly self-employed people use is to treat roughly 25-30% of gross profit as "not really mine" from the very first invoice, rather than adjusting the savings rate only once the second bill is known.

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Reducing Payments on Account If Income Falls

If your income for the year ahead is genuinely expected to be lower — perhaps you're scaling back, a major client relationship ended, or your business circumstances have changed — you can apply to reduce the automatically-calculated payment on account via your HMRC online account or form SA303, rather than paying the full amount and waiting for HMRC to refund the overpayment later.

Be cautious with this: if the reduction turns out to be too aggressive and your actual liability is higher than the reduced payments, HMRC charges interest on the shortfall between what you paid and what the original (unreduced) payment on account would have been — calculated from the original due date, not from when the true liability became known.

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The Long-Term Pattern

Once through the year-two transition, payments on account become a steady, predictable rhythm for most self-employed taxpayers with growing or stable income: pay half in January, half in July, true up the balance the following January. The unusual jump is specifically the year-two bill, where the balancing payment for the year just gone and the first payment on account for the year ahead land on the same date — understanding this in advance is the key to avoiding a genuine cash-flow crisis when it happens.