Payments on Account: What They Are and How to Reduce Them

For many self-employed individuals and landlords in the UK, managing tax payments throughout the year can be a challenge. Payments on account are HMRC’s way of collecting Income Tax in advance, helping to spread the cost of your tax bill. In 2026/26, more than 4.5 million taxpayers will make payments on account, reflecting how common this system is among small businesses and sole traders.

What Are Payments on Account?

Payments on account are advance payments towards your next Income Tax bill. They apply if you’re self-employed, a partner in a business, or a landlord with rental income, and your last tax bill was over £1,000 (after deducting any tax already paid through PAYE). Introduced to help taxpayers manage cash flow, these payments split your tax liability into two equal instalments rather than a lump sum.

HMRC expects these to be paid twice yearly: on 31 January and 31 July during the tax year. Each payment is usually 50% of your previous year’s Income Tax and Class 4 National Insurance contributions. This system helps you avoid a large tax bill at the end of the year by spreading payments more evenly.

How Payments on Account Are Calculated

Your payments on account are based on your previous year’s Self Assessment tax bill. To calculate each payment:

1. Take your total Income Tax and Class 4 National Insurance liability for the previous tax year.
2. Subtract any tax already paid via PAYE or other methods.
3. If the remaining balance is over £1,000, divide it in half.
4. Each half is a payment on account due for the current tax year.

For example, if your 2023/24 tax bill (Income Tax + Class 4 NICs) was £3,200, and you had no tax deducted at source, your payments on account for 2025/26 would be £1,600 each, payable by 31 January 2026 and 31 July 2025.

Example Calculation

When Do Payments on Account Apply?

You will be required to make payments on account if your last Self Assessment tax bill was more than £1,000 and less than 80% of your total tax was collected at source (for example, via PAYE). This threshold ensures that small tax bills or those mostly collected through PAYE are exempt.

Payments on account generally apply to:

• Sole traders and freelancers
• Partners in business partnerships
• Landlords with rental income
• Individuals with other untaxed income

If your tax bill is less than £1,000 or most tax is collected at source, you won’t need to make payments on account and can pay your tax in a single payment by 31 January after the tax year.

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How to Reduce Payments on Account

If you anticipate that your income (and therefore tax bill) for the current year will be significantly lower than the previous year, you can apply to HMRC to reduce your payments on account. This can ease cash flow pressures but must be done carefully to avoid underpaying and incurring interest or penalties.

To reduce your payments on account, you need to submit a claim to HMRC using form SA303 or online via your Government Gateway account. You will need to provide a reasonable estimate of your income and tax liability for the current year.

Steps to Reduce Payments on Account

1. Log in to your HMRC online account or download form SA303.
2. Provide an estimate of your expected Income Tax and Class 4 NICs for the current tax year.
3. Specify the amount you want your payments on account to be reduced to.
4. Submit the form or online request before the payment due date (31 January or 31 July).
5. Keep records supporting your estimate in case HMRC requests evidence.

Remember, if you reduce payments on account too much and end up owing more tax, HMRC will charge interest on the underpaid amount. It’s best to be realistic when estimating your liability.

Balancing Payment and Final Tax Bill

After the end of the tax year (5 April), you file your Self Assessment tax return, declaring your exact income and tax owed for the year. The balancing payment is the difference between your actual tax bill and the payments on account already made.

This balancing payment is due by 31 January following the end of the tax year, along with your first payment on account for the next tax year. For example, for the 2025/26 tax year, the balancing payment and the first payment on account for 2026/26 are due by 31 January 2026.

If you have overpaid through payments on account, HMRC will either refund you or use the overpayment to reduce your next payment on account.

Common Mistakes and How to Avoid Them

Many small business owners make errors calculating or managing payments on account, which can lead to unexpected tax bills or penalties. Common pitfalls include:

• Not budgeting for payments: Forgetting the 31 January and 31 July payment deadlines can cause cash flow issues.
• Underestimating income: Reducing payments on account too aggressively without solid evidence can lead to interest charges.
• Ignoring the balancing payment: Assuming payments on account cover all tax can result in a surprise bill in January.
• Failing to update estimates: Income or expenses changing significantly during the year should prompt a review of payments.

To avoid these issues, keep detailed records, use HMRC’s online calculators, and consider consulting an accountant or tax adviser for personalised advice. For more detailed tax planning, see our Self Assessment tax return guide.