Payments on account are one of the most confusing aspects of the UK Self Assessment system. Every year, thousands of people are shocked by a January tax bill that is nearly double what they expected – because they did not realise they were paying not just for last year, but also an advance payment towards the next year.
This guide explains everything you need to know about payments on account in 2026: what they are, how they are calculated, when they are due, and most importantly – how to reduce them if your income has dropped.
What Are Payments on Account?
Payments on account are advance payments towards your next year’s income tax bill, collected by HMRC at the same time as you pay your previous year’s tax.
The principle is straightforward: HMRC does not want to wait until January to collect all the tax for a year – by then, the year in question is nine months in the past. Instead, HMRC requires you to pay some of next year’s estimated tax in advance, in two equal instalments.
HMRC bases each payment on account on your previous year’s tax bill. The assumption is that your income will be roughly similar next year, so paying half of last year’s bill in January and the other half in July roughly keeps you current.
Who Has to Make Payments on Account?
You must make payments on account if BOTH of the following apply:
- Your Self Assessment tax bill (excluding any tax already collected through PAYE) is more than £1,000 for the year
- Less than 80% of your total tax liability was collected at source through PAYE or other withholding
If your tax bill is £1,000 or less, or if 80% or more of your tax was collected through PAYE, no payments on account are required – you simply pay the balance by 31 January each year.
Payments on account typically affect:
- Self-employed sole traders with no employment income
- Landlords with significant rental income
- Company directors with dividend income
- Anyone with substantial savings interest, foreign income, or capital gains
How Payments on Account Are Calculated
Each payment on account equals 50% of your previous year’s tax and Class 4 NI bill.
Important: Payments on account are based on income tax and Class 4 NI only. They do not include:
- Capital Gains Tax
- Student Loan repayments
- PAYE tax (already collected at source)
Example:
Your 2025/26 tax return shows:
- Income tax: £8,000
- Class 4 NI: £2,000
- Total: £10,000
Each payment on account for 2026/27 = £10,000 ÷ 2 = £5,000
Your January 2027 payment would therefore include:
- Balancing payment for 2025/26: whatever remains unpaid (after subtracting any payments on account already made for 2025/26)
- First payment on account for 2026/27: £5,000
Your July 2027 payment:
- Second payment on account for 2026/27: £5,000
If your 2026/27 actual bill turns out to be higher than £10,000, you pay the balancing payment in January 2028. If it is lower, HMRC refunds the overpayment.
The January Shock – Understanding Why Your First Bill Feels So Large
The “payments on account shock” hits hardest in your first year of Self Assessment. Here is why:
In January after your first year of self-employment, you owe:
- Your actual tax for Year 1
- PLUS the first payment on account for Year 2 (50% of Year 1’s bill)
If your Year 1 tax bill is £8,000, your first January payment is £8,000 + £4,000 = £12,000. Many first-year sole traders are completely unprepared for this.
Planning tip: Set aside 25–30% of your self-employment profit each month throughout the year. This builds a fund that covers both your annual tax and the payments on account without a cash crisis in January.
How to Reduce Your Payments on Account
This is the most valuable thing many taxpayers do not know: you can request a reduction in your payments on account if you believe your income this year will be lower than last year.
Why would your income be lower?
- You worked less in the current year (took time off, illness, career change)
- Your business had a bad year
- You had a one-off item in the previous year (property sale, large contract) that inflated last year’s tax bill
- You made a large pension contribution this year that will significantly reduce your taxable income
How to reduce payments on account:
You can apply to reduce your payments on account through your HMRC online account at any time before the payment deadline:
- Log into your Government Gateway account at gov.uk
- Navigate to Self Assessment → Manage your payments on account
- Enter your revised estimate of your current year’s tax bill
- HMRC immediately adjusts the payment due
There is no requirement to justify the reduction in advance – you simply enter your lower estimate and HMRC accepts it.
Warning: If you reduce your payments on account and your actual bill turns out to be higher than the reduced estimate, HMRC will charge interest on the shortfall from the original payment date. The interest rate (currently Bank of England base rate + 2.5%) applies from the original due date, not from when the final bill is raised.
This means reducing payments on account when your income has not actually fallen can be costly. Only reduce them if you genuinely expect lower income.
Balancing Payments and Repayments
At the end of each tax year, HMRC calculates your actual tax bill and compares it to the payments on account already made:
If actual bill > payments on account: You have a balancing payment to make by 31 January.
If actual bill < payments on account: HMRC repays the overpayment. Repayments are usually processed within two to four weeks of your return being filed. You can request the repayment to your bank account via your HMRC online account.
Capital Gains Tax and Payments on Account
Capital Gains Tax is not included in the payments on account calculation. If you sell a residential property in 2026/27 and make a significant capital gain, that CGT is paid:
- For residential property: within 60 days of completion via the UK Property Disposal Return
- For other assets: as part of your January 2027 balancing payment
This means a large CGT liability in 2026/27 will appear as a balancing payment in January 2027 without any advance payments having been made – potentially creating a larger than expected January bill.
Frequently Asked Questions
What if I can’t afford my payment on account? Contact HMRC immediately (0300 200 3822) and ask for a Time to Pay arrangement. If arranged before the deadline, HMRC will not charge a late payment penalty (though interest on the outstanding amount continues).
Can I opt out of payments on account entirely? No – if your tax bill exceeds £1,000 and you meet the criteria, payments on account are mandatory. The only way to legitimately reduce them is to reduce your actual tax bill (through pension contributions, timing of income, etc.) or to make a formal reduction request.
My payment on account seems too high – can I check the figure? Yes. Log into your HMRC online account and check the calculation. If the figure looks wrong (e.g. it appears to include CGT or one-off items that should not be included), contact your accountant to review before making a reduction request.
A Real-Life Example
Client C was a freelance brand designer in his first year of self-employment. His net profit for 2024/25 was £52,000 and his total income tax and Class 4 NI liability came to approximately £13,400.
When we prepared his return in December 2025, we had to explain that his January payment would not be £13,400. It would be £13,400 plus the first payment on account for the following year of £6,700, making £20,100 due by 31 January 2026. He had set aside around £14,000 and was genuinely shocked.
We applied to reduce his July 2026 payment on account because his income that year was lower due to a career break, bringing it down from £6,700 to £3,200. We also helped him set up a dedicated savings account where he now puts 28% of every invoice aside throughout the year. He has since referred three other freelancer friends to us. All of them had the same January shock in their first year.
Book your free 15-minute consultation: calendly.com/yourtaxhelp/15min
Worried about a large January tax bill? At Your Tax Help Accountants in Stanmore, we review every client’s payments on account position and advise on legitimate reductions where appropriate. Call Talha on 07478 645331, email info@yourtaxhelp.co.uk, or visit yourtaxhelp.co.uk
