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Payments on Account: Why HMRC Takes Tax Twice and How to Reduce Them

Understand HMRC payments on account in 2026/27: what they are, who pays, the January and July deadlines, and how to apply to reduce them. YRF Accountants, Bolton & Manchester.

Call 01204 938696 or email [email protected]

Few things shock the newly self-employed more than discovering that settling last year's tax bill is only half of what is due on 31 January. HMRC's payments on account system means that millions of taxpayers face a double payment every January, clearing the previous year's balance while simultaneously paying the first instalment toward the year they are currently living in. Understanding how this works, when it applies, and when you can legally reduce it is not just useful tax knowledge; it is essential cash flow management for anyone outside PAYE.

Self-employed individuals, freelancers, landlords, and limited company directors drawing dividends all encounter the payments on account regime the moment their Self-Assessment bill crosses the threshold. This guide explains the mechanics clearly, so the deadline never catches you off guard again.

What Are Payments on Account?

Payments on account are advance payments toward your current year's Self-Assessment tax liability, calculated as a percentage of what you owed the previous year. HMRC's logic is straightforward: rather than waiting until January 31st of the following year to collect the full liability, they collect two instalments throughout the year as a proxy for the tax you are likely to owe.

Each payment on account is equal to 50% of your previous year's tax bill excluding Capital Gains Tax, student loan repayments, and Class 2 National Insurance giving HMRC a total advance collection of 100% of the prior year's liability before you have even filed the current year return.

Who Has to Make Payments on Account?

The payments on account obligation applies when both of the following conditions are met:

Your Self-Assessment tax bill for the previous year exceeds £1,000

Less than 80% of your total tax liability was collected at source through PAYE

In practice, this catches virtually every self-employed person, sole trader, property investor, and consultant whose income is not fully taxed through payroll. Being self-employed and managing your own tax obligations means that payments on account are not an optional complication; they are a structural feature of the Self-Assessment system that you need to plan around from year one.

The Payment Deadlines: January, July, and January Again

The payments on account calendar runs on a fixed cycle that overlaps with the Self-Assessment filing deadline. Here is exactly what is due and when in the 2026/27 tax year:

Payment	Due Date	What It Covers
First payment on account	31 January 2027	50% of your 2025/26 Self-Assessment tax bill
Second payment on account	31 July 2027	50% of your 2025/26 Self-Assessment tax bill
Balancing payment	31 January 2027	Any 2025/26 tax owed above the two payments on account already made
First payment on account	31 January 2027	First advance payment toward your estimated 2026/27 liability

This is why 31 January is so punishing for many taxpayers: it simultaneously demands the balancing payment for the year just ended and the first advance payment for the current year. A taxpayer who owed £8,000 for 2025/26 and made no payments on account faces a January bill of up to £12,000 — £8,000 balance plus £4,000 first payment on account — before they have earned a single pound in 2026/27.

How to Reduce Your Payments on Account Legally

If your income in the current tax year is genuinely lower than the previous year — perhaps because you changed career, lost a major client, reduced working hours, or sold a rental property, you are entitled to apply to reduce your payments on account to reflect your expected actual liability.

This is done through HMRC's online Self-Assessment account by submitting what is known as a SA303 claim. You simply state the lower amount you believe your tax bill will be and HMRC adjusts both instalments accordingly.

The Critical Warning: Get the Estimate Right

Reducing your payments on account is legal, sensible, and often advisable but the estimate must be realistic. If you reduce them below what you actually owe, HMRC charges interest on the shortfall from the original due dates, not from when the error is discovered. The interest rate HMRC applies to underpaid tax is not insignificant, and unlike a penalty it cannot be appealed away on the basis of reasonable excuse.

Getting the estimate right requires a clear picture of your current year income, allowable expenses, and any reliefs you intend to claim. Tax planning tips for the self-employed and contractors covers several of the income and expense considerations that feed directly into this calculation.

When Payments on Account Genuinely Hurt Cash Flow

The most common situation where payments on account cause acute cash flow pressure is the first year of crossing the £1,000 threshold. In that year, you not only owe the full balance for the year just ended — you also owe the first 50% advance for the year ahead, all on the same January deadline. The total can be 150% of the first year's bill, due before you have had a chance to save for it.

Landlords who sold a property in the year and generated a Capital Gains Tax liability face a different version of the same problem: the CGT element is excluded from the payments on account calculation, but the rental income element is not. Specialist landlord tax planning that models these interactions before the year ends — rather than after — is the difference between a manageable January and a genuinely stressful one.

Payments on Account and the Broader Self-Assessment Picture

Payments on account do not exist in isolation — they are one element of a broader Self-Assessment obligation that encompasses filing deadlines, penalties, allowable expenses, and tax reliefs. The Self Assessment rules and what they mean for individuals are worth understanding in full if you are new to filing outside PAYE, because the penalties for late filing and late payment compound quickly.

For those who want their returns prepared accurately, their payment on account schedule managed proactively, and their overall tax position kept as efficient as possible, working with a dedicated Self Assessment tax return accountant transforms what most people treat as an annual scramble into a managed, predictable process.

Stop letting HMRC's payment schedule control your cash flow. YRF Accountants manages Self-Assessment, payment on account planning, and reduction applications for clients across Bolton, Manchester, and Bury.

Book a Free Self Assessment Review

Payments on Account:

Rule	Detail
Trigger threshold	Self-Assessment tax bill over £1,000 and less than 80% collected via PAYE
Each payment amount	50% of prior year's liability (excl. CGT, student loans, Class 2 NIC)
First payment deadline	31 January (same day as balancing payment for prior year)
Second payment deadline	31 July
Reduction mechanism	SA303 claim via HMRC online account — apply any time before or on the deadline
Risk of over-reducing	Interest charged on shortfall from original due date, not from discovery
Interest rate on late/underpayment	HMRC's late payment interest rate, currently above 7% per annum

Frequently Asked Questions: Payments on Account

What are payments on account for Self-Assessment?	Payments on account are advance payments toward your next Self-Assessment tax bill. HMRC requires two instalments each year — due 31 January and 31 July — each equal to 50% of your previous year's tax liability, excluding Capital Gains Tax and student loan repayments.
Who has to make payments on account?	You must make payments on account if your Self-Assessment tax bill exceeds £1,000 and less than 80% of your tax is collected at source through PAYE. Most self-employed people, freelancers, landlords, and company directors with significant dividend income will be caught by these rules.
Can I reduce my payments on account if my income drops?	Yes. You can apply to reduce your payments on account at any time via your HMRC online account if you believe your current year's tax liability will be lower than the previous year. If you reduce them incorrectly, HMRC will charge interest on the shortfall from the original due dates.
What happens if I miss a payment on account deadline?	HMRC charges interest on late payments from the due date, and late payment penalties can apply for amounts unpaid beyond 30 days. Unlike late filing penalties, interest on underpaid payments on account accrues automatically and is not waivable.
Does the January 31st deadline include both balancing payment and first payment on account?	Yes. The 31 January deadline covers two amounts simultaneously: the balancing payment for the previous tax year (any tax owed above the payments on account already made) and the first payment on account for the current tax year. For many people this is the single largest tax payment of the year.
Are payments on account included in my Self-Assessment return?	Yes. Your Self-Assessment return calculates your total liability and shows the payments on account due for the following year automatically based on your current year bill. Your accountant can flag in advance whether a reduction application would be appropriate.
Can YRF Accountants help me manage payments on account?	Yes. YRF Accountants prepares Self-Assessment returns and advises self-employed individuals, landlords, and directors across Bolton, Manchester and Bury on payment on account planning, reduction applications, and cash flow timing to avoid unexpected tax bills.