Payments on Account Explained: What They Are, How to Reduce Them, and What Happens If You Get It Wrong

If you’re new to Self Assessment, or you’ve just received a tax bill that seems higher than expected, the chances are you’ve come face to face with “payments on account.” They catch many taxpayers off guard — not because the rules are complicated, but because nobody explains them clearly before the bill lands. This guide sets out exactly how payments on account work, how you can legitimately reduce them, and what it costs you if you get that reduction wrong.

What are payments on account?

Payments on account are advance payments towards your next tax bill. Rather than waiting until the following January to collect the whole amount you owe, HMRC asks certain taxpayers to pay half of it in advance — twice.

You’ll usually be asked to make payments on account if, for the previous tax year:

• Your Self Assessment tax bill (including Class 4 National Insurance, if applicable) was more than £1,000, and
• Less than 80% of your tax liability was already collected at source (for example, through PAYE)

If both of those apply to you, HMRC assumes your next year’s bill will be roughly similar to your last one, and asks you to pay towards it in two instalments:

• 31 January — during the tax year itself
• 31 July — shortly after the tax year ends

Each payment is normally 50% of your previous year’s Income Tax and Class 4 NIC liability. Capital Gains Tax and student loan repayments are never included in the calculation — these are always settled through a balancing payment instead.

A worked example

Say your Self Assessment bill for 2025/26 came to £6,000, made up entirely of Income Tax and Class 4 NIC. Your payments on account for 2026/27 would be calculated as follows:

• First payment on account: £3,000, due 31 January 2027
• Second payment on account: £3,000, due 31 July 2027

When you file your 2026/27 return, if your actual liability turns out to be £7,000, you’ll owe a balancing payment of £1,000 on 31 January 2028 — plus your first payment on account for 2027/28. If your actual liability is only £5,000, you’ve overpaid by £1,000, which HMRC will refund or offset against what you owe next.

Why the first year comes as a shock

The first time you fall into payments on account — whether that’s your first year of self-employment or simply the first year your bill exceeds £1,000 — the January bill can be startling. You’re paying your balancing payment for the year just gone and your first payment on account for the year ahead, all on the same date. In effect, you can be asked to pay up to 150% of a single year’s tax bill in one go. It’s worth budgeting for this in advance rather than being caught out.

Reducing your payments on account

Payments on account are based on last year’s figures, which means they can easily overstate what you’ll actually owe if your income has fallen — for example, because of a quieter year in business, a change in circumstances, or a one-off item last year that won’t recur. If you reasonably expect your tax bill for the current year to be lower than the year before, you can apply to reduce your payments on account.

You can do this:

• Online, through your HMRC personal tax account, or
• By post or online using form SA303

There’s no limit on how many times you can apply to adjust your payments on account, and you can do so at any point before the balancing payment deadline. When you apply, you’ll need to give HMRC a reasonable estimate of what you expect your liability to be, and your payments will be recalculated accordingly.

Reducing your payments on account can be a genuinely useful cash flow tool. If you know your income is down, there’s little point handing HMRC money you’ll only be refunded later. Common reasons to consider a reduction include:

• A downturn in trading profits or fewer clients
• Ceasing self-employment or reducing hours
• A large one-off item of income in the previous year that won’t be repeated
• A change to more PAYE income and less untaxed income

There’s no need to notify HMRC if you think your bill is going to be higher — you simply pay the balancing amount when your return is filed.

The penalty for getting a reduction wrong

This is the part that catches people out. Reducing your payments on account isn’t free of risk — if you reduce them too far, and your actual liability turns out higher than the amount you estimated, HMRC doesn’t just ask for the shortfall. It charges interest on the underpayment, backdated to the original due date of each payment on account — not from when you eventually settle up.

In practical terms, this means:

• If you claim your liability will be £2,000 when it should have been £6,000, HMRC will charge interest on the £2,000 shortfall on each instalment, calculated from 31 January and 31 July respectively — even if you don’t discover the true figure until you file your return the following January.
• The current HMRC late payment interest rate is 7.75% (effective from 9 January 2026), set at the Bank of England base rate plus 4%. This rate moves with the base rate, so it’s worth checking the current figure before making an estimate.
• Interest is charged as simple interest, calculated daily, for as long as the shortfall remains unpaid.

Unlike a penalty, this interest charge isn’t optional or subject to appeal on grounds of reasonable excuse in the way a late filing penalty might be — it’s simply the cost of having underpaid. The safest approach is to only reduce your payments on account when you’re genuinely confident your income is falling, and to build in a reasonable margin rather than cutting the estimate to the bone.

What if you simply miss the payment deadline?

Separately from the interest charged on an over-reduced estimate, missing a payment on account deadline altogether also triggers interest at the same rate, from the day after the due date until the payment is made. Payments on account don’t currently carry the same fixed late payment penalties (5% of the tax due at 30 days, 6 months and 12 months) that apply to a missed balancing payment — but the interest still accrues, and it adds up quickly at current rates.

Getting it right

The key things to remember:

1. Know your threshold — payments on account only apply if your prior year bill was over £1,000 and less than 80% was collected at source.
2. Budget for the first year — your first bill under the system can be up to 1.5 times a normal year’s liability.
3. Reduce with evidence, not hope — only apply to lower your payments on account if you have a genuine, reasonable basis for expecting lower income, and keep records to support your estimate.
4. Don’t cut it too close — err on the side of a slightly higher estimate. The interest clock starts from the original due date, not the date you realise you were wrong.
5. Review as the year progresses — if your circumstances change again, you can revise your estimate more than once before the balancing payment falls due.

If you’re unsure whether payments on account apply to you, or whether a reduction is the right call this year, it’s worth getting a proper review of your figures before you submit an estimate to HMRC — the cost of professional advice is usually far lower than the interest on getting it wrong.

This article is for general guidance only and does not constitute tax advice. Rates and thresholds are correct as at July 2026 and are subject to change — please check the current position with HMRC or your accountant before making a decision based on this information.