Payments on account: why your January tax bill is 150% of what you expected

Every January, thousands of newly self-employed people open their Self Assessment bill and find a figure far larger than the tax they calculated for the year. Nothing has gone wrong. They have met payments on account.

The system is not a penalty and it is not a mistake, but it is genuinely poorly explained, and the cash-flow shock in year one is real. This guide sets out exactly how the numbers work and what you can do about them.

At a glance

What payments on account actually are

Employees pay tax as they earn, every month, through PAYE. The self-employed do not — they pay after the year has ended. Payments on account are HMRC's mechanism for closing that gap, by asking you to pay towards the current year before it finishes.

The rule is mechanical. If your Self Assessment liability for a tax year is more than £1,000, you must make two payments on account towards the following year, each equal to half of the liability just assessed:

• The first is due on 31 January, alongside the balancing payment for the year just ended.
• The second is due on 31 July.

There is one exception. If more than 80% of your tax was already deducted at source — typically because most of your income is taxed under PAYE and only a small part is untaxed — payments on account are not required.

Why the first January is 150%

Consider Ravi, whose first year of self-employment produces a tax and National Insurance liability of £6,000.

Ravi calculated a £6,000 bill and is asked for £9,000 in January. That is the 150%, and it is why the first year is the one that causes trouble.

The following January is easier. If his liability is again £6,000, he has already paid £6,000 through the two payments on account, so his balancing payment is nil — he only pays the £3,000 first payment on account for the next year. The system has smoothed out.

Estimate your own figures with the Self-Employed Tax Calculator, which now shows the payments on account schedule alongside the headline liability.

What the payments cover, and what they do not

Payments on account cover income tax and Class 4 National Insurance — charged at 6% on profits between £12,570 and £50,270, and 2% above that.

They do not cover Class 2 National Insurance, or capital gains tax, or student loan repayments. Those are always settled in the balancing payment, which is why the January figure rarely divides neatly in half.

This is worth knowing when you check the arithmetic. If your payment on account is not exactly half of last year's total bill, this is usually why.

The second year, and the year after that

It is worth following the cycle through, because the first year is genuinely unrepresentative and people make decisions based on it.

Say Ravi's second year is better and his liability rises to £8,000. He has already paid £6,000 in payments on account, so his balancing payment is £2,000. On top of that, his payments on account for year three are recalculated at half of £8,000, so the first one is £4,000. His January total is £6,000 — higher than the previous January's balancing figure, but no longer the brutal 150% multiple.

Now say year three is worse and the liability falls to £5,000. He has already paid £8,000 through payments on account, so he is £3,000 in credit. HMRC refunds the difference or sets it against the next payment. The system self-corrects in both directions; it simply does so a year late.

The practical consequence is that a growing business always feels behind and a shrinking one always feels ahead. Neither is a problem with the tax; it is the inevitable result of paying this year's tax based on last year's figures.

Why the bill is bigger than you think in year one

There is a second reason first-year bills surprise people, separate from payments on account.

A first year of self-employment often runs from a start date part way through a tax year, but the bill lands eighteen to twenty-two months later. Someone who started trading in May 2026 files by 31 January 2028 — by which point they have been trading for over eighteen months and may have spent all of the profit from the first year on living costs, with no reserve set aside.

The gap between earning and paying is the real trap. Payments on account merely make the first bill larger; the long delay is what makes it unaffordable. That is why setting money aside from the very first invoice matters far more than any planning done in January.

Can you reduce them?

Yes. If you expect your income to fall — you have lost a major client, reduced your hours, taken a salaried job, or had a genuinely exceptional year previously — you can apply to reduce your payments on account to a figure you specify.

You can do this through your online account or on the return itself. HMRC does not generally question the claim at the time.

But be careful, because the risk sits entirely with you. If you reduce the payments and your actual liability turns out to be higher, HMRC charges interest on the shortfall, calculated back to the original due dates as though you had underpaid all along. Where the reduction was excessive and not made on a reasonable basis, a penalty is also possible.

The sensible approach is to reduce them only where you have a concrete reason and can support the estimate, and to be conservative rather than optimistic. Reducing them to nil because you hope for a quieter year is how people acquire an interest charge on top of a bill they could not pay.

What happens if you cannot pay

Contact HMRC before the deadline rather than after. A Time to Pay arrangement lets you spread the amount over monthly instalments, and for straightforward Self Assessment debts below a threshold this can often be set up online without speaking to anyone.

Interest still accrues on amounts paid late, but a Time to Pay arrangement generally prevents late payment penalties from being charged, and it stops the debt escalating into enforcement. The critical detail is timing: arrangements agreed before the deadline are treated far more favourably than those negotiated after a debt has already gone overdue.

Ignoring a bill you cannot pay is the worst available option, and it is the one people most often choose.

How to stop it being a shock

1. Set money aside from every payment you receive. A separate savings account and a fixed percentage of each invoice is the simplest system that works. Most sole traders at basic rate should be putting aside somewhere between a quarter and a third.
2. Remember the first year is worse. Plan for 150%, not 100%, of your calculated liability in your first January.
3. File early. You can file from 6 April and still pay on 31 January. Knowing the number in April rather than late January gives you nine months to prepare for it.
4. Diarise 31 July. The second payment on account catches people who budgeted only for January.
5. Do not spend the tax money. Obvious, and the single most common cause of a January crisis.

How it ends

If you stop being self-employed, payments on account do not stop automatically. You need to tell HMRC that your circumstances have changed, and apply to reduce the payments to nil if no liability will arise.

Otherwise you will continue receiving demands for tax on income you are no longer earning — and because they are formally due, they accrue interest until either paid or successfully reduced. Closing the position properly takes one form.

Our guide to registering for Self Assessment covers the other end of the process, and the Tax Deadline Tracker will remind you of both January and July.

A note on how to use this

This guide explains the rules as they stand for the 2026/27 tax year and is written to help you understand your own position. It is general information, not personal financial advice — your circumstances change the answer, sometimes completely. For a decision that matters, speak to a regulated adviser or check directly with HMRC. Our calculation methodology sets out where every figure on this site comes from.

Where these figures come from

Every rate and threshold on this page is checked against HMRC's published guidance for the 2026/27 tax year. If you spot a figure that looks out of date, please tell us.

• GOV.UK guidance for this topic