Payments on account are one of the most common sources of genuine shock for people who are new to Self Assessment. You do your sums, you work out roughly what you owe, and then HMRC presents you with a figure that is anything up to twice as large. It is not a mistake. It is the system working exactly as designed — it just was not explained to you first.

The short version: payments on account explained means that HMRC asks you to pay your current year’s tax bill and make advance payments towards the following year, all wrapped into the same January deadline. Once you understand the logic behind it, the numbers make sense. What does not always make sense is the timing — and that is where a little forward planning goes a long way.

When you owe tax through Self Assessment, HMRC assumes your income is broadly similar from one year to the next. Rather than waiting until January 2027 to collect your 2026/27 tax in full, it asks you to make two advance payments — one in January and one in July — each worth half of your previous year’s tax bill. These are payments on account.

So if your 2025/26 tax bill came to £4,000, HMRC would also ask you to pay £2,000 on 31 January 2026 and a further £2,000 on 31 July 2026 as advance payments towards 2026/27. If your actual 2026/27 liability turns out to be more than £4,000, you pay the difference — called a balancing payment — the following January. If it is less, you get a refund or a credit against your next bill.

For the self-employed, payments on account include Class 4 National Insurance contributions as well as Income Tax — so the advance payment covers your full Self Assessment liability, not just the income tax portion. It is worth knowing this because it is easy to underestimate the total if you are only thinking about income tax.

Not everyone has to make payments on account. HMRC applies two tests. If you pass either of them, you are off the hook for advance payments — at least for that year.

• Your previous year’s Self Assessment tax liability was less than £1,000. Below this threshold, HMRC considers the amounts too small to warrant an instalment system.
• More than 80% of your tax was collected at source. If most of your income is taxed through PAYE — say you have a salaried job alongside some freelance work — HMRC may already have collected the bulk of what you owe, so advance payments are not required.

If neither of those applies, you are in the payments on account system. The deadlines are fixed: 31 January and 31 July each year. Missing either one triggers interest — currently 7.75% on late amounts as of January 2026, which adds up quickly if you leave a large balance unpaid for several months.

One thing we see regularly: people who move from employment to self-employment mid-year, or who have a particularly good year, suddenly find themselves caught by the threshold for the first time. The jump from owing nothing to owing 150% of one year’s tax in a single January can feel brutal. It is entirely manageable with planning — but not if it catches you by surprise.

Yes — and this is genuinely useful to know. If you expect your income to be lower in the coming year, you can apply to reduce your payments on account to reflect that. You can do this through your HMRC online account or by submitting a paper form (SA303).

This is a legitimate tool. If you have had a good year but know the following year will be quieter — a contract ended, you took time off, your business model changed — there is no sense in overpaying and waiting for a refund. Apply to reduce, pay what you actually expect to owe, and avoid tying up cash unnecessarily.

The important caveat: HMRC can charge interest if you reduce your payments more than was genuinely justified. If your actual liability turns out to be higher than you claimed it would be, interest runs on the underpaid amount at the current late payment rate. This is not usually a problem when the reduction is based on a real expectation. It becomes a problem when people reduce their payments on account speculatively — to ease cashflow in the short term — without a genuine basis for expecting lower income.

We tend to advise clients to make a realistic forecast before deciding to reduce. A rough projection is far better than guessing, and it means you can defend the decision if HMRC ever queries it.

Even when clients understand payments on account in principle, the balancing payment catches them out in practice. Here is the scenario we see most often.

Someone pays their two instalments on time — January and July. They assume that is them done. Then the following January arrives, and on top of the next round of payments on account, they also owe a balancing payment for the year just ended, because their actual tax bill came in higher than their advance payments covered.

That January deadline therefore contains three amounts at once: the balancing payment for the year just closed, the first payment on account for the current year, and sometimes an adjusted amount if their circumstances changed. It is a lot of money leaving your account on the same day.

The practical answer is to set money aside throughout the year — not just near the deadlines. At DG Accountancy, we help clients model their expected liability early in the tax year so that January never feels like a crisis. Knowing what is coming three months out is very different from finding out when the bill arrives.

If your tax position is complex — multiple income streams, rental income, investment gains — this kind of forward visibility matters even more. A proactive accountant should be flagging these things before the deadline, not after.

It is worth being aware that HMRC is actively consulting on what it calls ‘timely payments’ for Income Tax Self Assessment. The proposal, which could come into effect from around April 2029, would move some taxpayers towards more regular in-year payments — potentially collecting some Self Assessment tax through PAYE where possible — rather than relying on the current twice-yearly instalment system.

The stated aim is to reduce ‘bill shock’ — the same problem this post addresses. The concern raised by some practitioners is that basing payments on forecasts rather than actual liabilities could create its own complications, particularly for businesses with variable income.

Nothing is finalised yet, and 2029 is a reasonable distance away. But if you are self-employed or running a business with personal tax obligations, it is worth staying across these consultations. The way you manage your cashflow and tax planning today could look different in a few years’ time — and the earlier you build good habits around forecasting your liability, the better placed you will be regardless of how the rules evolve.

For now, the current system applies. Two payments a year, clear deadlines, and the option to reduce if your circumstances genuinely change.