What Is a Payment on Account? [Comprehensive Explanation]

The difficulty with a payment on account is that it typically appears at the worst possible time, just after the festive season, when cash flow may already be tight.

Because they’re calculated automatically by HM Revenue & Customs (HMRC) based on your previous year’s tax bill, they can significantly increase what you owe on 31 January.

If you don’t understand how the system works, it’s easy to be caught off guard.

On the bright side, payments on account aren’t an extra tax, and once you understand how they’re calculated and when they’re due, they become far more manageable.

Read on to learn more about a payment on account so that you know exactly what to expect and how to prep for it.

Key points

• Payments on account are advance tax payments 💷
  If your Self Assessment bill is over £1,000 and most of your tax was not deducted at source, you will usually pay tax in two instalments each year. Each is typically 50% of your previous year’s income tax and Class 4 National Insurance.
• January combines two bills into one deadline 📅
  On 31 January, you often pay your balancing payment for the previous year and your first payment on account for the new year.
• Late payments become expensive quickly ⏰
  Interest starts immediately after the deadline, and penalties can be added at 30 days, 6 months, and 12 months if unpaid.
• The right tools remove the stress 🙌
  With ANNA, you can track income, estimate tax in real time, set aside money automatically, and file directly to HMRC, helping you stay prepared year-round.

What is a payment on account?

A payment on account is an advance payment towards your next tax bill.

Instead of waiting until the end of the tax year and paying everything in one go, HMRC requires certain taxpayers to make two advance payments each year. These are based on your previous year’s tax bill.

The payment on account process goes as follows:

• You submit your Self Assessment tax return.
• HMRC calculates how much tax you owe for that year.
• If you meet certain criteria, you’ll also need to start making advance payments towards the following year’s tax bill.

Payments on account help HMRC collect tax more evenly and reduce the risk of large unpaid balances building up.

A payment on account vs a balancing payment

A balancing payment is the difference between what you’ve already paid, including payments on account, and what you actually owe for the year.

At the end of the tax year, once your return is submitted, HMRC calculates your true liability.

There are three possible outcomes:

1. Your payments on account exactly match your bill: Nothing more to pay.
2. You owe more than you’ve paid: You must make a balancing payment by 31 January following the end of the tax year.
3. You’ve paid too much: You’ll receive a refund, or you can leave it on account for future liabilities.

For example:

You made two payments on account of £4,000 each, totalling £8,000. At the end of the year, your actual tax bill turns out to be £9,500.

That means that you owe: £9,500 total liability minus £8,000 already paid = £1,500 balancing payment due on 31 January.

If payments on account still apply, you would also start making payments towards the following tax year.

This rolling system continues each year as long as your circumstances require payments on account.

Who has to make a payment on account?

Not everyone who files a Self Assessment return needs to make payments on account.

Whether you’re required to do so depends on two main conditions:

• Your last Self Assessment tax bill was more than £1,000
• Less than 80% of your tax was collected at source, for example, through PAYE.

If both of these apply, HMRC will automatically calculate payments on account and include them in your bill.

Payments on account usually apply to:

• Self-employed individuals
• Freelancers and contractors
• Landlords with rental income
• Company directors receiving dividends
• People with significant untaxed income

What are the deadlines for a payment on account?

There are two key deadlines for payments on account each year:

• 31 January: First Payment on Account (due midnight), combined with any balancing payment for the prior tax year. For many taxpayers, this is the most expensive tax date of the year.
• 31 July: Second Payment on Account (due midnight). There is no tax return due in July, just the second instalment.

These dates don’t change. If the deadline falls on a weekend or bank holiday, it shifts to the previous working day.

What happens if you miss a payment on account deadline?

If you miss a payment on account deadline, interest starts building up straight away. Even if you arrange a Time to Pay agreement, interest still applies until the balance is cleared.

Each missed instalment is treated separately, so January and July are judged on their own. The rate is the Bank of England base rate plus 2.5% (around 7.5% as of early 2026).

If the payment remains unpaid, penalties are added on top of interest:

• 30 days late: 5% of the unpaid tax
• 6 months late: Another 5% of what’s still outstanding
• 12 months late: A further 5% of the remaining balance

So the longer it goes unpaid, the more expensive it becomes.

If you realise you’ve missed a deadline, the best move is to act quickly. Pay as much as you can straight away. Even part payments help reduce the daily interest.

If cash flow is tight, contact HMRC within 30 days to set up a Time to Pay arrangement. This way, you can avoid the initial 5% penalty.

How do you calculate payments on account for Self Assessment?

Payments on account are calculated based on your previous year’s tax bill.

In most cases, each instalment is 50% of that total, covering your income tax and, if you’re self-employed, your Class 4 National Insurance (NI).

To calculate the sum you’ll need to pay, look at your total income tax and Class 4 NI from your last tax return. You’ll find this on your tax calculation or SA302. Then, divide that number by two. That gives you the amount you’ll owe in January and again in July.

For example, if your total liability for the 2024–2025 tax year was £4,000, each payment on account for 2025–2026 would be £2,000.

Reducing your payment on account

You can apply to reduce your payments on account if you believe your next year’s tax bill will be lower.

This is relevant if:

• Your income has dropped
• You’ve stopped trading
• You’ve had fewer contracts
• Your rental income has lowered
• Business expenses have increased significantly

You can apply to reduce payments on account through your HMRC online account or by completing the SA303 form, which includes your Unique Taxpayer Reference (UTR) and HMRC office details, and sending it by post.

However, you should be cautious.

If you reduce your payments too much and your actual tax bill ends up being higher than expected, HMRC will charge interest on the shortfall from the original due dates.

Claiming overpaid payments on account as a refund

When you submit your tax return, HMRC recalculates your final bill.

If it turns out that your payments on account were higher than your actual liability for the year, the overpayment is normally refunded automatically.

In most cases, the refund is issued within two to four weeks.

It’s usually sent to the bank account linked to your HMRC profile, or sometimes back to the card you last used to make a payment.

You don’t need to submit a separate claim unless there’s an error.

Does Making Tax Digital (MTD) have an impact on a payment on account?

From April 2026, MTD for income tax starts to apply to many self-employed individuals and landlords.

This is part of a wider shift by HMRC towards digital record-keeping and more frequent reporting.

Under MTD, instead of filing just one Self Assessment tax return each year, affected taxpayers will:

• Keep digital records of income and expenses
• Send quarterly updates to HMRC using compatible software
• Submit a final declaration at the end of the tax year

This raises an important question: Does MTD change how payments on account work?

MTD changes how and when you report your income, not how and when you pay your tax.

Payments on account are still calculated in the same way. So even though reporting becomes more frequent, the payment structure remains annual, just as it is now.

MTD actually brings one significant benefit.

Because you’ll be updating your figures quarterly, you should have a much clearer picture of your income throughout the year.

As a result, it makes it easier to:

• Budget for upcoming payments on account
• Spot early if your income has dropped
• Decide whether it’s sensible to reduce your payments on account

Did you know?

MTD doesn’t have to mean more admin. ANNA’s Auto Accountant is an AI-powered solution, built specifically for the UK tax system.

It handles your MTD properly and automatically creates your digital records from your bank activity.

It means no manual data entry, no errors, and no messy spreadsheets.

You simply review and approve quarterly updates, and we submit them directly to HMRC.

How can ANNA make payments on account easier?

ANNA is an all-in-one business app that can register your business, send and track invoices, do your bookkeeping and file your VAT, Corporation Tax and MTD Self Assessment.

Here’s what we provide:

• Automatic expense capture and categorisation: Ensures that every transaction is recorded and every expense is correctly categorised and claimed
• Real-time tax estimates: Enables you to see exactly how much you owe to HMRC at any time, with no surprises
• Smart money pots: Automatically set aside a percentage of your income for tax, so you’re prepared when the bill arrives
• Smart invoicing: Creates invoices quickly, sends and tracks them automatically, and matches payments without manual work
• Built-in UK business account: Lets you manage cards, transfers, and payments all in one place
• Automated VAT returns: Enable accurate calculations and seamless filing, helping you stay fully compliant with MTD
• Automated MTD Income Tax Self Assessment solution: Calculates taxes efficiently, prepares your documents, and files them directly under Making Tax Digital rules

One of the biggest perks is that you don’t need to learn complicated software or undergo a long, technical setup process.

Also, there’s no need to keep manual logs or hire an accountant to handle the admin. Everything runs in the background, taking care of the work for you.

Sign up for ANNA today and take the stress out of tax, invoicing, and bookkeeping in one place.

FAQ:

1. Can I ignore payments on account if I think my income will drop?

No, you can’t. They apply automatically if you meet the criteria. However, you can apply to reduce them if you genuinely expect your tax bill to be lower.

Just be careful not to reduce them too far without good reason, as you’ll be charged interest on any shortfall later.

2. What do payments on account include?

They usually cover income tax and Class 4 National Insurance if you’re self-employed.

They don’t include capital gains tax and student loan repayments – these fall under the balancing payment instead.

3. When can I stop making payments on account?

Payments on account continue as long as your tax bill remains over £1,000, and when less than 80% of your tax is collected at source.

If your income falls significantly or you move into employment where most tax is deducted through PAYE, payments on account may stop automatically.

4. Why does HMRC show such a large amount due in January?

January is the ‘heavy’ payment month because it combines your balancing payment and your first payment on account.

Then, in July, you only pay the second payment on account, which is why July bills are often smaller.