Payments on account: paying Self Assessment tax before the year ends

What are payments on account?

Payments on account are advance payments of income tax (and Class 4 National Insurance included in your Self Assessment bill) based on your previous year’s liability. Each payment is typically 50% of your prior year’s tax due, split across two deadlines:

• 31 January — Balancing payment for the tax year just ended, plus first payment on account for the current year
• 31 July — Second payment on account for the current year

When does HMRC require them?

Generally, if your Self Assessment tax bill is more than £1,000 and less than about 80% of tax was collected at source (e.g. PAYE), payments on account are triggered. Many growing sole traders hit this in their second or third year of trading.

Our UK tax calculator estimates total tax and NI and shows a quarterly-style figure useful for saving — formal payment on account amounts come from HMRC after you file.

Worked example (simplified)

Suppose your 2024–25 Self Assessment liability (tax + Class 4 NI) is £10,000 and payments on account apply for 2025–26:

• By 31 January 2026 you might pay the £10,000 balance for 2024–25 plus £5,000 first payment on account for 2025–26
• By 31 July 2026 you pay another £5,000 on account for 2025–26

When you file 2025–26, those £10,000 on account are credited. If actual liability is £12,000, you pay £2,000 balancing by the next January; if actual is £8,000, you may reclaim overpayment.

Reducing payments on account

If you expect profits to fall, you can ask HMRC to reduce payments on account to reflect lower expected income — but reduce only with reasonable grounds. Underpaying leads to interest. If income rises, you may still owe more at balancing payment time.

Budgeting as a sole trader

Rules of thumb many freelancers use:

• Set aside 25–30% of profit for income tax and Class 4 NI (higher if you are an additional-rate taxpayer)
• Add student loan repayments separately (Plan thresholds differ)
• Consider pension contributions to reduce taxable profit (within annual allowance)

Separate “tax pot” bank accounts prevent spending money that is not truly take-home pay.

Trading allowance interaction

Electing the £1,000 trading allowance lowers taxable profit when expenses are small — that flows through to lower payments on account in future years once filed.

First year vs later years

Year one often has no payments on account (no prior liability). Year two’s January deadline can feel harsh because you pay prior year balance plus forward payments. Planning from month one avoids shock.