UK payments on account and the second-year shock
Payments on account catch out almost every first-time Self Assessment filer, because the first January bill is not one year's tax. It is 150% of it — last year's balance plus half of it again as an advance on the current year.
How the mechanism works
HMRC asks for two advance payments toward the current year, each 50% of the previous year's income tax and Class 4 National Insurance liability:
| Date | What is due |
|---|---|
| 31 January | Balancing payment for the year just filed, plus first payment on account |
| 31 July | Second payment on account |
The regime is set out in the Taxes Management Act 1970. You are outside it if your liability was under £1,000, or if at least 80% of your tax was already collected at source through PAYE or deduction.
The first-year cash-flow shock
Take a sole trader whose first full year produces a liability of £12,000 (income tax plus Class 4).
| Date | Item | Amount |
|---|---|---|
| 31 January 2028 | Balancing payment for 2026/27 | £12,000 |
| 31 January 2028 | First payment on account for 2027/28 | £6,000 |
| Due that day | £18,000 | |
| 31 July 2028 | Second payment on account for 2027/28 | £6,000 |
| Total in the tax year | £24,000 |
Someone who set aside £12,000 — a full and correct provision for the year's tax — is £6,000 short on the day. This is not a penalty or an error; it is the system moving you onto a pay-as-you-go footing, and it only ever happens once. From the second year, each January is a balancing payment plus an advance of similar size.
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Once inside the regime, the payments largely absorb the liability. Suppose 2027/28 comes in at £13,500 against £12,000 of payments on account already made:
| Item | Amount |
|---|---|
| 2027/28 liability | £13,500 |
| Less payments on account made | (£12,000) |
| Balancing payment due 31 January 2029 | £1,500 |
| Plus first payment on account for 2028/29 (50% of £13,500) | £6,750 |
| Due 31 January 2029 | £8,250 |
The balancing payment is small because the advances did most of the work. This is the pattern to budget for: roughly one and a half times a normal year's tax every January, and half in July.
Reducing a payment on account — and the risk
Payments on account are based on last year, so a year where profits fall means paying an advance on income you will not earn. You can apply to reduce them using form SA303, or through your online account.
The risk is specific and worth stating plainly. Reduce the payments below what the year actually turns out to require, and HMRC charges interest from the original due dates as though the full amount had always been payable. On a £6,000 payment reduced to £2,000 where the full amount was in fact due, interest runs on the £4,000 from 31 January. Reduce for a genuine, evidenced fall in profits — not as a cash-flow tactic.
Conversely, if profits have risen, the payments on account will be too low and the balancing payment in January will be larger than expected. It is worth computing the likely liability in the spring rather than discovering it at the end of January.
What payments on account do and do not cover
| Included in the calculation | Not included |
|---|---|
| Income tax | Capital gains tax |
| Class 4 National Insurance | Class 2 National Insurance |
Capital gains tax and Class 2 are always paid in full with the balancing payment, never spread. If the disposal was a property, check the separate reporting deadline before assuming January covers it — see UK residence where the disposal has a cross-border element. Someone who sold an asset during the year has a January bill made up of a balancing payment, a payment on account, and the whole CGT charge — three things at once.
Where this goes wrong
- Budgeting one year's tax for the first January. Budget 150%.
- Forgetting 31 July. No reminder arrives with the force of the January date.
- Reducing payments optimistically. Interest runs from the original due dates.
- Expecting CGT to be spread. It is not.
- Assuming the advances mean you have finished. Rising profits leave a larger balancing payment.
Related: Self Assessment deadlines and penalties and self-employed National Insurance.
Sources
This guide is written against the official and clearly labelled professional references below. Rates, thresholds and portal procedures change between reviews, so open the primary source before relying on a figure.
Questions people also ask
What are payments on account?
Advance instalments toward the following year's liability, each generally half of the previous year's bill, due on 31 January and 31 July. They are not an extra tax, just earlier collection.
Why is my second-year bill so much larger?
Because 31 January in your second year carries the balancing payment for the year just filed plus the first payment on account for the next — effectively one and a half years' tax on one date.
Can I reduce my payments on account?
Yes, if you genuinely expect a lower liability. But if you reduce them too far HMRC charges interest on the shortfall, so the claim must rest on a defensible estimate rather than optimism.
Is there a level below which they do not apply?
Payments on account are not required where the previous year's liability was below a small threshold, or where most of your tax was deducted at source. Check your statement rather than assuming.
Do they apply to a company?
No. Payments on account are a Self Assessment mechanism. Corporation Tax has its own payment timing, and larger companies pay by quarterly instalments instead.
Send the tax year and the transaction or filing involved, and we will tell you what is actually required.
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