Payments on Account Explained: Why HMRC Wants Tax Early (UK 2026/27)
Every January, thousands of newly self-employed people open their HMRC Self Assessment statement and ask the same question: "Why do I owe tax for a year that hasn't even finished yet?" The answer is Payments on Account — HMRC's system of collecting tax in advance. It feels unfair, but it is entirely logical once you understand the mechanics. This guide explains exactly how Payments on Account work, when they apply, how to reduce them legally if your income drops, and why missing the 31 July deadline costs far more than you think.
Contents
1. What Are Payments on Account?
Payments on Account are advance payments towards your next tax bill. Instead of paying all your tax in one lump sum after the year ends, HMRC asks you to pay roughly half of your expected liability twice a year — on 31 January and 31 July.
Think of it like paying a deposit on a hotel room. You pay part upfront, then settle the final bill when you check out. With tax, you pay two "deposits" during the year, then file your tax return to work out the exact amount owed. The Payments on Account are deducted from the final bill. If you overpaid, you get a refund. If you underpaid, you pay the difference (called a balancing payment).
2. Who Has to Pay Them?
You must make Payments on Account if both of the following are true:
- Your last Self Assessment tax bill was more than £1,000
- Less than 80% of your tax was deducted at source (e.g., through PAYE)
In practice, this catches most self-employed people, landlords, and those with significant untaxed income. If you are employed and only have a small side hustle that pushes your tax bill to £1,200, you will likely face Payments on Account.
You do not have to make Payments on Account if:
- Your Self Assessment bill was £1,000 or less
- You are already paying 80% or more of your tax through PAYE (e.g., a large salary with a small untaxed side income)
- This is your first year of Self Assessment (see below — you get a one-year grace period)
3. How HMRC Calculates Them
HMRC assumes your next year's tax bill will be identical to the previous year's. Each Payment on Account is therefore:
The "previous year's tax bill" includes Income Tax and Class 4 National Insurance contributions due through Self Assessment. It does not include Capital Gains Tax, which is always paid in full via the balancing payment.
Example Calculation
Suppose your 2025/26 Self Assessment shows:
- Income Tax due: £6,000
- Class 4 NICs: £1,200
- Total tax bill: £7,200
- Less tax already paid via PAYE: £0
- Net tax to pay: £7,200
Because £7,200 is above the £1,000 threshold, Payments on Account are triggered for 2026/27:
- First Payment on Account (31 Jan 2027): £3,600
- Second Payment on Account (31 July 2027): £3,600
- Total paid in advance: £7,200
When you file your 2026/27 return by 31 January 2028, suppose your actual tax bill is £8,500. You have already paid £7,200, so your balancing payment is £1,300. But because your 2026/27 bill is now £8,500, your Payments on Account for 2027/28 will be £4,250 each.
4. The Self Assessment Timeline
Understanding the dates is half the battle. Here is how a typical year flows for a sole trader:
6 April 2026 — Tax year starts
You begin earning. Keep records from day one.
5 October 2026 — Registration deadline
If newly self-employed, you must register for Self Assessment by this date.
31 January 2027 — First deadline
File your 2025/26 return AND pay the balancing payment for 2025/26 AND pay the first Payment on Account for 2026/27. This triple bill shocks many first-timers.
31 July 2027 — Second Payment on Account
Pay the second instalment towards your 2026/27 tax bill.
5 April 2027 — Tax year ends
Stop counting income for 2026/27. Gather all records.
31 January 2028 — Final reckoning
File your 2026/27 return. Pay any balancing payment AND the first Payment on Account for 2027/28.
⚠️ The First-Year Shock
Your very first Self Assessment bill can be brutal. If you owe £5,000 for 2025/26, your 31 January 2027 payment is not £5,000 — it is £5,000 + £2,500 (first Payment on Account for 2026/27). That is £7,500 due in one day. Many new freelancers do not realise this and face cash flow crises. Budget for it from month one.
5. Worked Example: A Freelancer's First Year
Sarah starts freelancing in June 2025. Her first tax year is 2025/26. She earns £32,000 in profit and has no other income.
| Item | Amount |
|---|---|
| Taxable profit | £32,000 |
| Personal Allowance | £12,570 |
| Income Tax (20% on £19,430) | £3,886 |
| Class 2 NICs (£3.45 × 52) | £179.40 |
| Class 4 NICs (6% on £19,430) | £1,165.80 |
| Total 2025/26 tax bill | £5,231.20 |
Because £5,231.20 is above £1,000, Sarah must make Payments on Account for 2026/27. Each is half of £5,231.20 = £2,615.60.
On 31 January 2027, Sarah pays:
- 2025/26 balancing payment: £5,231.20
- First Payment on Account 2026/27: £2,615.60
- Total due: £7,846.80
On 31 July 2027, she pays:
- Second Payment on Account 2026/27: £2,615.60
By 31 January 2028, she has paid £5,231.20 in advance. If her actual 2026/27 bill is £6,000, she pays a balancing payment of £768.80. If her actual bill is £4,500, she gets a refund of £731.20.
6. How to Reduce Payments on Account
If you expect your next year's income to be lower — perhaps you lost a major client, went back to employment, or paused your side hustle — you can legally reduce your Payments on Account. You are not locked into paying based on last year's earnings.
Method 1: Online (Fastest)
- Log in to your HMRC online account
- Go to Self Assessment
- Select "Reduce Payments on Account"
- Enter your estimated tax liability for the current year
- HMRC adjusts your remaining payments immediately
Method 2: Form SA303
Download form SA303 from gov.uk, fill in your estimated tax, and post it to HMRC. This takes 2–4 weeks to process. Do not use this if the deadline is close — use the online method instead.
🚨 The Risk of Over-Reduction
If you reduce your Payments on Account and your actual tax bill turns out higher, HMRC charges interest on the shortfall from the original due date. The interest rate is currently around 7.75% per annum. If you deliberately understate your income to reduce payments, HMRC may also charge a penalty for careless or deliberate behaviour of up to 30% of the tax underpaid.
When Reduction Makes Sense
- You have stopped trading or significantly reduced hours
- You have taken a permanent PAYE job and your self-employed income has dropped
- You have sold a rental property that generated most of your tax liability
- You have made large pension contributions that will reduce your taxable income
7. Penalties and Interest
Missing a Payment on Account is expensive. The penalty structure is:
| Late By | Penalty | Interest |
|---|---|---|
| 1–30 days | None | Yes — from day one |
| 30 days | 5% of tax unpaid | Continues accruing |
| 6 months | Additional 5% | Continues accruing |
| 12 months | Additional 5% (total 15%) | Continues accruing |
Interest is calculated daily and compounded. At 7.75%, a £5,000 unpaid bill grows by roughly £1.06 per day. After six months, that is nearly £200 in interest alone — before penalties are added.
If you genuinely cannot pay, contact HMRC immediately. They may agree a Time to Pay arrangement, letting you spread the debt over 6–12 months. You still pay interest, but penalties are usually suspended if you stick to the agreed schedule.
8. Calculate Your Tax Bill
Use our free calculators to estimate your Self Assessment liability and see whether Payments on Account will apply to you:
Work Out Your Self Assessment Bill
Enter your income and expenses to see your tax, NICs, and whether you'll face Payments on Account.
Open Sole Trader Tax Calculator →Have a Day Job Too?
If you're employed and self-employed, use our combined calculator to see your total tax picture.
Open PAYE + Side Hustle Calculator →9. Frequently Asked Questions
Do Payments on Account include VAT?
No. Payments on Account are purely for Income Tax and Class 4 NICs collected through Self Assessment. VAT is a completely separate system with its own quarterly or monthly deadlines. If you are VAT registered, you must pay VAT separately via your VAT return.
What if I pay too much and HMRC owes me a refund?
If your Payments on Account exceed your actual tax bill, HMRC automatically refunds the difference, usually within 2–4 weeks of you filing your tax return. You can also opt to have the overpayment credited against next year's Payments on Account instead of receiving a cash refund. This is useful if you know your income will stay high.
Can I pay Payments on Account by Direct Debit?
Yes. You can set up a Budget Payment Plan via your HMRC online account, spreading Payments on Account into weekly or monthly Direct Debits. This is excellent for cash flow management. Alternatively, you can set up a single Direct Debit for the full amount on the due date. Beware: Direct Debits take 5 working days to set up, so do not leave it until 30 January.
Do I still make Payments on Account if I am in construction CIS?
CIS (Construction Industry Scheme) deductions are tax deducted at source. If 80% or more of your tax is collected through CIS deductions, you do not need to make Payments on Account. However, many CIS subcontractors still owe a small balancing payment because CIS is deducted at 20% but their actual tax rate may be lower (if they are basic rate) or higher (if they are higher rate). If the balancing payment is under £1,000, Payments on Account are not triggered.
What happens if I stop being self-employed?
If you stop trading, notify HMRC to close your Self Assessment record. Any overpaid Payments on Account for the current year will be refunded once you file your final tax return. If you have already made the 31 January payment but stop trading in March, you may have overpaid significantly — file your final return promptly to trigger the refund.
📚 Sources & References
HMRC Guidance: Self Assessment — Payments on Account (SA110)
HMRC Penalties for Late Payment: CC/FS11
HMRC Interest Rates for Late Payment (currently 7.75% from April 2025)
Finance Act 2007, Schedule 3: Penalties for late payment of income tax
HMRC Form SA303: Claim to Reduce Payments on Account