What are payments on account — and how do you avoid the January shock?
Payments on account are advance payments toward next year's Self Assessment bill. They are one of the biggest first-year surprises for sole traders because they can make January feel much larger than the tax bill you expected.
What payments on account are
HMRC asks many Self Assessment taxpayers to pay some of next year's bill in advance. The idea is simple: if you owed tax this year, HMRC assumes you may owe a similar amount next year. Instead of waiting until the following January, you make two instalments.
When they apply
Payments on account commonly apply when your Self Assessment bill is more than £1,000 and less than 80% of your tax is collected at source. They do not usually include student loan repayments or capital gains tax in the same way, so your HMRC calculation may split the figures.
The January shock example
Suppose your first Self Assessment bill is £5,000. You might expect to pay £5,000 by 31 January and move on. Instead, HMRC may also ask for the first payment on account toward next year, equal to half of that bill.
- Balancing payment for last year: £5,000
- First payment on account for next year: £2,500
- Total due by 31 January: £7,500
- Second payment on account due by 31 July: £2,500
That is why a “£5,000 tax bill” can feel like a £7,500 January problem. The extra £2,500 is not a penalty; it is advance tax for the current year.
How to plan for it
Do not only save for the tax year that has just ended. If your profit is growing, save as if payments on account may apply. Use the weekly tax set-aside calculator to turn an annual estimate into a regular transfer, and revisit the estimate when a large contract starts or ends.
Can you reduce payments on account?
Yes, if you genuinely expect next year's bill to be lower. HMRC lets you apply to reduce payments on account, including through form SA303 or your online tax account. This is useful if your income has dropped, you stopped trading, or more tax will be collected through PAYE.
Be careful: reducing too far can create interest if the final bill is higher than the reduced payments. Use a conservative estimate rather than reducing simply because the January number feels uncomfortable.
What if you cannot pay?
Contact HMRC as early as possible. You may be able to arrange a Time to Pay plan, but interest can still apply. Ignoring the bill is usually worse than speaking to HMRC before the deadline.
Payments on account checklist
- Estimate your tax before January, not after filing.
- Check whether your bill is likely to trigger payments on account.
- Save for January and July if your first bill is above £1,000.
- Use SA303 or your online account only when next year's bill is genuinely lower.
- Keep written assumptions so you can explain why you reduced a payment.
For the broader filing calendar, read Key HMRC dates for sole traders in 2025/26.
Official source
HMRC explains the rule on GOV.UK: Understand your Self Assessment bill: payments on account.