Self-Employment Tax: Register to Submit / Lesson 10 of 12

Payments on account: the January shock

Story 7 min read Paying, and staying out of trouble Includes a calculator

Your first bill was £3,000. HMRC has asked for £4,500. Nothing has gone wrong.

The short answer

✓ Your first January bill includes next year's first instalment, so it is 150% of the liability
✓ Payments on account apply once your bill is over £1,000
✓ There are two instalments: 31 January and 31 July
✓ You can apply to reduce them, but underestimating means interest from the original due date

What happened to Maya

Maya went freelance in her first full tax year and did everything right. She kept her records, claimed her expenses properly, and worked out that she owed £3,000 in tax. She set aside £3,000.

In January, HMRC asked her for £4,500.

Nothing had gone wrong. Nobody had made a mistake. She had simply met payments on account for the first time, and no one had warned her.

What payments on account actually are

Once your Self Assessment bill goes over £1,000, HMRC stops waiting a full year for its money. It starts asking you to pay towards next year's bill in advance, in two instalments, each one half of your last known liability.

Maya's first January

Tax owed for the year just ended    £3,000
First payment on account (50%)      £1,500
------------------------------------------
Due on 31 January                   £4,500

Second payment on account (50%)     £1,500
Due on 31 July                      £1,500

So her first January bill was 150% of what she actually owed. The following year, assuming her income is similar, her January payment drops back to roughly half, because she has already paid the rest in advance.

Why the first year hurts and the second does not

Payments on account are not an extra tax. They are the same tax, collected earlier. The pain is entirely a one-off cash flow problem in the first year you cross the threshold, because you are paying one and a half years of tax within a single twelve-month window.

Date	What is due	Amount
31 January, year 1	Year 1 balance plus first instalment	£4,500
31 July, year 1	Second instalment	£1,500
31 January, year 2	Year 2 balance, less the £3,000 already paid	Balance only

When they do not apply

Payments on account are not triggered if your bill is £1,000 or less, or if more than 80% of your tax was already collected at source, for example through PAYE on a job you also hold. That second exemption is why someone with a small side business alongside employment often never meets them at all.

The bit HMRC does not spell out

You can apply to reduce your payments on account if you genuinely expect to earn less. What the guidance does not emphasise is the sting: if you reduce them too far, HMRC charges interest on the shortfall calculated from the original due date, not from when you realised.

In other words, reducing your payments is a forecast, and being wrong is not free. If you are unsure, it is usually cheaper to pay the full instalment and receive a refund than to underestimate and pay interest.

What to do about it

In your first profitable year, set aside 1.5 times your expected tax bill, not one times.
Put the July instalment in the calendar the moment you file. It is the payment people forget entirely.
If your income genuinely drops, apply to reduce, but be conservative about the figure.
Move tax money to a separate savings account as you earn, rather than finding it in January.

Try it on your own numbers

This is the same calculator as the full tool page, using 2026/27 rates.

Your last Self Assessment

Tax bill due via Self Assessment

Income tax + Class 4 NI for the year (exclude CGT and student loan).

Tax already collected at source

Tax taken off through PAYE, etc. Enter 0 if none.

Key takeaways

✓ Your first January bill includes next year's first instalment, so it is 150% of the liability
✓ Payments on account apply once your bill is over £1,000
✓ There are two instalments: 31 January and 31 July
✓ You can apply to reduce them, but underestimating means interest from the original due date

Check you have got it

3 quick questions. No score is kept, and you can change your mind.

1. Your first Self Assessment bill is £3,000. What will HMRC ask you to pay on 31 January?

2. When do payments on account start applying?

3. You know next year will be much quieter. What can you do?

Sources

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