Payments on Account Explained: Why Your First Tax Bill Is 150% Higher

If you have just filed your first Self Assessment tax return as a sole trader and received a bill for significantly more than you expected, you are not alone. The culprit is almost certainly payments on account — HMRC’s system of advance tax payments that catches thousands of new sole traders off guard every year.

This article explains exactly how payments on account work, why your first bill appears to be 150% of what you owe, and what you can do to manage the cash flow impact.

What Are Payments on Account?

Payments on account are advance payments towards your next year’s tax bill. HMRC assumes that your income this year will be roughly the same as last year, so it asks you to pay some of your tax in advance — in two equal instalments — rather than waiting for the whole amount to become due in one lump sum the following January.

Each payment on account is equal to 50% of your previous year’s tax liability. You make two of these payments during the year, which together cover 100% of your estimated tax for the current year.

Here is the payment schedule:

Payment	Due date	Amount
First payment on account	31 January (during the tax year)	50% of previous year’s tax bill
Second payment on account	31 July (after the tax year)	50% of previous year’s tax bill
Balancing payment (if needed)	31 January (following year)	Any remaining tax owed

The balancing payment covers the difference between what you actually owe and what you have already paid through your two payments on account.

Why Your First Tax Bill Is 150%

Here is where new sole traders get caught out. In your first year of Self Assessment, you have made no payments on account — because there was no previous year’s tax bill to base them on. When your first tax bill arrives, you owe:

100% of last year’s tax — the tax for the year you have just filed for
50% of next year’s estimated tax — the first payment on account

This means you pay 150% of one year’s tax liability in a single bill on 31 January.

A Worked Example

Let us say Sarah started freelancing in April 2024. She files her 2024/25 Self Assessment tax return by 31 January 2026. Her tax liability for 2024/25 is £5,000.

On 31 January 2026, Sarah must pay:

£5,000 — her full tax bill for 2024/25
£2,500 — her first payment on account for 2025/26 (50% of £5,000)
Total due: £7,500

Then on 31 July 2026, she must pay:

£2,500 — her second payment on account for 2025/26

When Sarah files her 2025/26 return in January 2027, her actual tax liability turns out to be £6,000. She has already paid £5,000 through her two payments on account (£2,500 + £2,500), so she owes a balancing payment of £1,000. But she also starts the cycle again with a first payment on account of £3,000 (50% of £6,000) for 2026/27.

Her bill on 31 January 2027: £1,000 + £3,000 = £4,000.

The Pattern Continues

Once you are in the system, the cycle repeats every year. You always pay:

A balancing payment for the year just ended (the difference between actual tax owed and payments on account already made)
A first payment on account for the current year (50% of last year’s liability)

The shock is heaviest in year one. After that, the payments on account smooth out your tax payments across the year — which is actually the intended purpose of the system.

When Payments on Account Apply

You must make payments on account if your Self Assessment tax bill is £1,000 or more and less than 80% of your total tax was collected at source (for example, through PAYE).

You do not need to make payments on account if:

Your Self Assessment tax bill is under £1,000
More than 80% of your tax for the year was deducted at source (common if you are employed and do a small amount of freelance work)

This means if you have a day job that covers most of your tax through PAYE, and your self-employment income only generates a small tax liability, you may avoid payments on account entirely.

How to Reduce Payments on Account

If you know your income has dropped or will drop significantly compared to the previous year, you can ask HMRC to reduce your payments on account. This is done through your Self Assessment online account or by contacting HMRC directly.

Common reasons to reduce payments on account:

You have lost a major client or contract
You are taking time off (parental leave, illness, sabbatical)
You have switched from self-employment to employment partway through the year
Your business income has genuinely decreased

Be careful with this. If you reduce your payments on account and your income does not actually fall as much as you predicted, you will owe a larger balancing payment in January — plus interest on the underpayment. HMRC charges interest at the late payment rate on any shortfall. Only reduce payments on account if you are genuinely confident your income has dropped.

To reduce your payments on account, you can:

Log in to your HMRC online Self Assessment account
Navigate to the payments on account section
Submit a claim to reduce, providing your estimated income for the current year

Alternatively, your accountant can do this on your behalf.

What Happens If You Overpay?

If your payments on account turn out to be more than your actual tax liability — perhaps because your income dropped — HMRC will refund the difference after you file your tax return. For example, if you made two payments on account totalling £5,000 but your actual tax liability was only £4,000, HMRC owes you £1,000.

Refunds are usually processed within a few weeks of filing your return, though it can sometimes take longer. The refund will either be sent to your bank account (if HMRC has your details) or by cheque.

Payments on Account and National Insurance

Payments on account cover both Income Tax and Class 4 National Insurance. They do not cover Class 2 National Insurance, which is collected separately (usually through your Self Assessment tax bill as a single annual payment). Student loan repayments are also excluded from payments on account — these are collected through the balancing payment.

A Full Year-by-Year Example

Let us follow Tom, a graphic designer who starts freelancing in 2024.

Year 1 — Tax Year 2024/25

Tom earns £40,000 profit. His tax and Class 4 NI liability comes to £6,400.

31 January 2026:

Item	Amount
2024/25 tax liability	£6,400
First payment on account for 2025/26	£3,200
Total due	£9,600

31 July 2026:

Item	Amount
Second payment on account for 2025/26	£3,200
Total due	£3,200

Tom has now paid £12,800 in total across his first year in the system: £6,400 for 2024/25 and £6,400 in advance for 2025/26.

Year 2 — Tax Year 2025/26

Tom’s profit rises to £45,000. His actual tax and NI liability for 2025/26 is £7,600. He already paid £6,400 in payments on account, so he owes a balancing payment of £1,200.

31 January 2027:

Item	Amount
Balancing payment for 2025/26	£1,200
First payment on account for 2026/27	£3,800
Total due	£5,000

31 July 2027:

Item	Amount
Second payment on account for 2026/27	£3,800
Total due	£3,800

From year two onwards, the pattern is more manageable — though that January bill still combines a balancing payment with a payment on account.

How to Prepare and Avoid the Cash Flow Shock

1. Know it is coming

The single most important thing is to be aware that payments on account exist before you get your first tax bill. If you started freelancing this year, you will owe 150% of your tax liability next January. Plan for it.

2. Set aside tax money monthly

Do not wait until January to find the money. Each month, transfer a percentage of your income into a separate savings account. A good rule of thumb is 25% to 30% of your profit (see our article on how much to set aside for tax). In your first year, consider saving a higher percentage — closer to 35% — to cover the additional payment on account.

3. File your tax return early

You can file your Self Assessment return from 6 April following the end of the tax year. Filing early does not mean you have to pay early — the payment deadline remains 31 January. But filing early means you know exactly how much you owe, giving you months to prepare rather than weeks.

4. Use a separate savings account

Open a dedicated savings account for tax money. Treat it as untouchable. Some business bank accounts (such as Starling, Tide, and Coconut) let you create tax pots or savings spaces specifically for this purpose.

5. Consider a Time to Pay arrangement

If you genuinely cannot afford your tax bill, HMRC offers Time to Pay arrangements that let you spread payments over up to 12 months. You can set these up online for debts up to £30,000 if you are within 60 days of the payment deadline. Interest will be charged on the outstanding balance, but this is far better than ignoring the bill and incurring late payment penalties.

Key Dates to Remember

Date	What is due
31 January	Balancing payment for the previous tax year + first payment on account for the current tax year
31 July	Second payment on account for the current tax year

Miss either date and you will face late payment penalties and interest charges. Set reminders well in advance.

The Bottom Line

Payments on account are not extra tax. They are simply a mechanism for paying your tax in advance, based on last year’s liability. The system works well once you are in the rhythm, but the first year can be a genuine shock if you are not prepared.

The 150% first bill is the most important thing for new sole traders to understand. If your first year’s tax liability is £5,000, expect to pay £7,500 next January. Plan for it from day one, set money aside monthly, and you will handle it comfortably.

This article was last updated on 14 February 2026. Tax rules are subject to change. Always check GOV.UK for current information or consult a qualified tax adviser.