HMRC asks most new sole traders for next year’s tax at the same time as this year’s bill. Here is why the first payment looks so large, and what you can do about it.
Summary
- Payments on account are advance payments towards next year’s tax, each normally half of your previous year’s income tax and Class 4 National Insurance bill.
- They usually apply when your Self Assessment bill is over £1,000 and less than 80% of your tax was deducted at source.
- The first payment on account is due on 31 January and the second on 31 July, so a first bill can reach 150% of the year’s tax.
- You can ask HMRC to reduce payments on account if you expect lower income, but interest applies if you reduce them too far.
- If you cannot pay in full, contact HMRC early, as an affordable payment plan may be possible.
If you have just filed your first Self Assessment tax return and the bill looks far bigger than the tax you owe, payments on account are usually the reason. It is not a mistake: HM Revenue and Customs (HMRC) is collecting an advance towards next year’s tax at the same time as this year’s bill. Understanding how the system works turns a shock invoice into something you can plan for.
What Are Payments on Account?
Payments on account are advance payments towards your next tax bill. HMRC works them out from the tax you owed in the previous year: each payment is normally half of that year’s income tax and Class 4 National Insurance liability, and you make two of them a year. They exist because Self Assessment tax is paid in arrears. Without them, tax on income earned in one tax year would not be settled until the January more than a year later, which makes budgeting harder and late payment more likely.
Why Does My First Bill Look Twice as Big?
In your first year of Self Assessment, no payments on account have been made during the year, because the system only starts once you have filed a return. So the 31 January deadline brings the full bill for the year just ended and, if you qualify, the first payment on account for the year that has just begun. In practice, that first payment can come to up to 150% of the year’s tax. From the second year onwards, the advance payments already made are credited against the bill, and the amounts even out.
Who Has to Make Payments on Account, and Who Is Exempt?
Payments on account usually apply when two conditions are both met: the income tax and Class 4 National Insurance you owe under Self Assessment is more than £1,000, and less than 80% of that liability was deducted at source. Tax deducted at source includes Income Tax collected through PAYE on employment income or a pension. If most of your income is taxed that way, no payments on account are due and you simply make one balancing payment after the year ends.
Some amounts never count towards payments on account. Capital gains tax, Student Loan repayments and Class 2 National Insurance are ignored in the calculation and appear only in the balancing payment. Payments on account you made in the previous year are also ignored when testing the £1,000 threshold.
How the Numbers Work: A Worked Example
Say your tax bill for 2023/24 was £3,000, and you made payments on account of £1,500 on 31 January 2025 and £1,500 on 31 July 2025. Your next return shows a bill of £3,200 for 2024/25. The payments already made cover £3,000 of it, so the calculation looks like this:
| Payment | Due date | Amount |
|---|---|---|
| Balancing payment for 2024/25 | 31 January 2026 | £200 |
| First payment on account for 2025/26 | 31 January 2026 | £1,600 |
| Second payment on account for 2025/26 | 31 July 2026 | £1,600 |
For someone filing for the first time, the same dates are heavier. With no advance payments already made, the whole £3,200 bill and the £1,600 payment towards 2025/26 both fall due on 31 January 2026, a total of £4,800.
When Do the Payments Have to Be Made?
The first payment on account is due on 31 January, the same day your online tax return and any balancing payment are due. The second is due on 31 July. HMRC does not send payment reminders, and the responsibility to pay on time sits with you even if no statement has arrived. Interest is charged on any tax unpaid after the due date, whether it is a payment on account or a balancing payment.
The timetable is set to change. Under rules taking effect from April 2029, people who make payments on account will pay in several smaller instalments spread across the year the income arises, rather than two larger sums afterwards, although the government has not yet decided how often those payments will fall. Returns will still be due by 31 January, and 2029 to 2030 will be a transition year as the old and new arrangements overlap.
Bear in mind
Payments on account are calculated automatically when your return is filed, based on the previous year’s liability. If your income has since fallen, nothing adjusts by itself; you need to make a reduction claim.
Can I Reduce My Payments on Account If My Income Falls?
Yes, if you have grounds for believing that payments based on last year’s bill would lead to an overpayment, for example because you expect your income to be lower. You can claim to reduce them through your online HMRC account or on form SA303. Two cautions apply. Interest is charged on any tax that ends up underpaid, and reducing the payments by too much simply stores up another bill for later. If your income has fallen because of business costs you had not claimed, our guide to claiming expenses as a sole trader explains what can legitimately reduce your profit. If you overpay instead, the excess can be refunded or credited against your next bill.
What If I Can’t Pay the Full Bill?
A Self Assessment calculation is a formal bill and creates a legally enforceable debt, so ignoring it makes matters worse, with interest running on anything unpaid from the due date. Before paying anything, check the figures against your return, because the calculation is only as accurate as the information in it. If the amount is right but you cannot cover it, contact HMRC as early as you can. An affordable payment plan may be possible, and the sooner you get in touch, the more options you are likely to have. If you are on a low income, the charity TaxAid can help you understand your bill and work out what to do next.
Next steps
- How to File Your First Self Assessment Tax Return: registration, records and deadlines, if this is your first return.
- Before You Register as Self-Employed With HMRC: what to sort out before you notify HMRC that you are trading.
- Sole Trader or Limited Company? What Changes for Your Tax: how changing business structure changes what you pay and when.
Questions readers ask
Do I make payments on account in my first year of Self Assessment?
No. The system only starts once you have filed a tax return, so your first bill covers the whole year at once. The first payment on account towards the following year is added at the same time.
Are capital gains and Student Loan repayments included in payments on account?
No. Capital gains tax and Student Loan repayments are excluded from the advance payments and only appear in the balancing payment due by 31 January.
What happens if I overpay through payments on account?
If the two payments and any balancing payment exceed what you actually owe, you can claim a refund through Self Assessment, or ask for the excess to be put towards your next bill.
Is the payments on account system changing?
Yes. Under rules starting in April 2029, people who make payments on account will pay in several smaller instalments spread across the year the income is earned, rather than twice afterwards. Final decisions on the payment schedule are still to come, and 2029 to 2030 will be a transition year.
This guide is general information, not financial advice. Rules, rates and allowances can change, so check the latest details with the provider, GOV.UK or the Financial Conduct Authority before making decisions. For advice on your own circumstances, speak to an FCA-authorised financial adviser.