Self Assessment Payment on Account: What It Is and How to Budget for It

Payments on account are one of the most misunderstood aspects of Self Assessment. They are the reason many sole traders face a much larger January bill than expected. Understanding how they work is essential for financial planning.

What Are Payments on Account?

Payments on account are advance payments towards your tax bill for the current tax year. They are based on the previous year's bill and are designed to spread your tax payments throughout the year rather than leaving everything to one lump sum in January.

Each payment on account is half of the previous year's tax bill (the tax and Class 4 NI, minus any tax deducted at source).

When Are They Due?

| Payment | Due date | Amount | |---------|----------|--------| | First payment on account | 31 January | 50% of previous year's bill | | Second payment on account | 31 July | 50% of previous year's bill | | Balancing payment | 31 January (following year) | Any difference between actual tax and payments on account |

The January Shock Explained

Here is why January can be expensive, especially in your second year of Self Assessment:

Example: Your 2025/26 tax bill is £6,000.

On 31 January 2027, you pay:

• £6,000 — balancing payment for 2025/26
• £3,000 — first payment on account for 2026/27
• Total: £9,000

On 31 July 2027, you pay:

• £3,000 — second payment on account for 2026/27

On 31 January 2028:

• Balancing payment for 2026/27 (difference between actual tax and £6,000 already paid on account)
• First payment on account for 2027/28

This cycle continues every year.

When Payments on Account Apply

You must make payments on account if:

• Your Self Assessment tax bill is more than £1,000, AND
• Less than 80% of your total tax was collected at source (through PAYE)

If your tax bill is under £1,000, or most of your tax is collected through PAYE, payments on account do not apply.

Reducing Your Payments on Account

If you expect your income to be significantly lower next year, you can apply to reduce your payments on account through your Government Gateway account.

Be careful. If you reduce them and your actual tax bill turns out to be higher, you will pay interest on the shortfall. Only reduce if you are confident your income is genuinely falling.

How to Budget

The simplest approach: set aside 30% of your profit each month in a separate savings account. This covers Income Tax, Class 2 NI, Class 4 NI, and provides a buffer for payments on account.

With Accounted, you see a real-time tax estimate throughout the year, including projected payments on account. This means you know exactly how much to save each month — no guessing, no surprises.

Spreading the Cost

If you cannot afford the full payment in January, HMRC offers Time to Pay arrangements. Contact their Self Assessment helpline before the deadline to discuss options. They may let you spread the payment over 6–12 months with interest.

Budget Payment Plan: You can set up a monthly Direct Debit to pay towards your tax bill throughout the year. This avoids the lump-sum shock and spreads the cost evenly.

Common Questions

Can I avoid payments on account? Only if your tax bill is under £1,000 or 80%+ is collected through PAYE. Otherwise, they are mandatory.

What if I overpay? If your actual tax bill is lower than the payments on account you have made, HMRC refunds the difference.

Do I pay interest on payments on account? No — payments on account themselves do not attract interest. But if you miss the deadline for paying them, interest and penalties apply.

MTD is coming. Accounted is already compliant. Start free and be ready before the deadline.