What is Payment on Account? A Complete UK Guide for Self-Employed Taxpayers

If you’re self-employed, a landlord, or run your own business in the UK, you have probably come across a line on your HMRC tax bill that leaves you confused and, often, a little worried. That line usually says “payment on account,” and it can add hundreds or even thousands of pounds to what you expected to pay. So, what is payment on account, and why does HMRC ask for it?

In simple terms, a payment on account is an advance payment towards your next year’s Self Assessment tax bill. HMRC collects this in addition to the tax you owe for the year you’ve just finished, which is why so many people are caught off guard the first time it appears. Understanding what is payment on account properly can save you from cash-flow surprises, missed deadlines, and unnecessary stress every January and July.

In this guide, we’ll explain everything you need to know: how payments on account work, who has to pay them, how HMRC calculates the amount, when they’re due, and — importantly — how to reduce payments on account HMRC legally if your income has dropped. We’ll also cover HMRC advance tax payment rules in detail and answer the most common questions people search for when trying to understand self assessment payments on account.

What is Payment on Account?

So, what is payment on account exactly? A payment on account is money you pay to HMRC in advance towards your upcoming tax bill, based on what you owed the previous year. Rather than waiting until the end of the tax year to collect the full amount you owe, HMRC splits your estimated bill into two advance instalments, plus a final “balancing payment” once your actual tax return is submitted.

This system exists because most employees have tax deducted automatically through PAYE (Pay As You Earn) every time they’re paid. Self-employed people, however, don’t have an employer deducting tax throughout the year, so HMRC uses payments on account to keep tax collection closer to “real time” and to reduce the risk of large, unmanageable tax bills building up.

Understanding what is payment on account also means understanding that it is not an extra tax — it’s simply your future tax bill being paid early, in instalments, based on an estimate.

How Do Self Assessment Payments on Account Work?

Self assessment payments on account apply to anyone who completes a Self Assessment tax return and owes more than a certain threshold in tax. Rather than paying HMRC an advance tax payment once a year, you’re asked to pay twice a year: once in January and once in July.

Here’s the basic structure of self assessment payments on account:

• First payment on account – due 31 January (the same date as your balancing payment for the previous tax year)
• Second payment on account – due 31 July
• Balancing payment – due the following 31 January, once your actual tax bill for the year is known

Each payment on account is usually 50% of your previous year’s tax bill. So if your total Self Assessment bill last year was £4,000, you’d typically be asked to pay £2,000 in January and another £2,000 in July towards the current year’s tax — on top of whatever you owe for the previous year.

What Are Payments on Account, Exactly, and Why Do They Exist?

A common follow-up question to “what is payment on account” is: what are payments on account actually for? The honest answer is cash flow — for HMRC, not for you. Because self-employed income isn’t taxed at source like a salary, HMRC would otherwise have to wait a full year (or more) to collect tax on profits you’re already earning. Payments on account close that gap by collecting an estimated amount sooner, based on the assumption that your income this year will be similar to last year.

HMRC Advance Tax Payment Explained

The term “HMRC advance tax payment” is often used interchangeably with payments on account, and for good reason — that’s exactly what they are. An HMRC advance tax payment is a forward payment towards tax that hasn’t technically been “earned” and assessed yet in the eyes of HMRC’s records, even though you may have already earned the income in real life.

It helps to think of an HMRC advance tax payment like a subscription renewal that assumes your usage stays the same. HMRC looks at your last known tax bill and assumes this year will look similar, so it asks you to pay towards it in advance. If your income actually goes up, you’ll owe a top-up (the balancing payment). If your income goes down, you may have paid too much — which is where reducing your payments on account becomes useful, and we’ll cover that shortly.

It’s worth noting that an HMRC advance tax payment only applies to Income Tax and Class 4 National Insurance calculated through Self Assessment. It does not usually apply to Capital Gains Tax or one-off, unusual sources of income, which are generally excluded from the payment on account calculation.

Who Has to Make Payments on Account?

Not everyone who submits a Self Assessment tax return has to make payments on account. HMRC applies two conditions, and you generally only need to pay if both apply:

1. Your last Self Assessment tax bill was more than £1,000
2. Less than 80% of your total tax owed was already collected at source (for example, through PAYE)

This means most sole traders, freelancers, contractors, and landlords with significant rental income will fall into the payments on account system, since little or none of their tax is deducted automatically during the year.

If most of your tax is already taken through PAYE — for example, if you’re mainly employed but have a small amount of side income — you may not need to make payments on account at all, since HMRC may consider that 80% threshold already met.

How Are Self Assessment Payments on Account Calculated?

HMRC calculates payments on account using a simple formula: it takes your total Self Assessment tax bill for the previous year (excluding anything already collected via PAYE, and excluding Capital Gains Tax and Student Loan repayments) and splits it in half.

Example Calculation

Let’s say your tax bill for the 2025–26 tax year was £6,000. Here’s what your payment schedule for the following year would typically look like:

• 31 January 2027: £6,000 (balancing payment for 2025–26) + £3,000 (first payment on account for 2026–27) = £9,000
• 31 July 2027: £3,000 (second payment on account for 2026–27)
• 31 January 2028: Balancing payment for 2026–27, based on your actual tax bill, minus the £6,000 already paid on account

This is exactly why the first bill under the payments on account system often feels like a shock — you’re effectively paying for last year and part of next year at the same time. Once you understand what is payment on account and how the timeline works, though, it becomes much easier to plan your cash flow around it in future years.

When Are Payments on Account Due?

Self assessment payments on account follow a fixed annual schedule set by HMRC:

• 31 January – First payment on account (plus any balancing payment owed from the previous year)
• 31 July – Second payment on account

If a payment deadline falls on a weekend or bank holiday, funds still need to clear by the deadline date, so it’s worth paying a few working days early to avoid late payment interest, which HMRC applies automatically from the day after the due date.

What is Payment on Account vs a Balancing Payment?

A question we hear often from clients is the difference between a payment on account and a balancing payment, since both appear on the same HMRC statement. Understanding what is payment on account compared with a balancing payment is straightforward once you separate the two ideas:

• A payment on account is an estimated, advance instalment towards your current tax year, based on last year’s bill.
• A balancing payment is the final “true-up” figure, calculated once your actual tax return for that year has been submitted and your real income is known.

If your income increased, your balancing payment will be higher than expected. If your income decreased, you might actually be due a refund, or your balancing payment could be smaller — or even negative, meaning HMRC owes you money.

How to Reduce Payments on Account HMRC – A Step-by-Step Guide

If your income has genuinely dropped compared to the previous year, you don’t have to accept HMRC’s automatic 50/50 estimate. Here’s how to reduce payments on account HMRC-approved and without penalty:

1. Log in to your HMRC online account or use your Self Assessment software.
2. Go to the option to “reduce payments on account” for the relevant tax year.
3. Enter your new estimated tax bill based on realistic, current-year figures.
4. Confirm the reduction — HMRC will adjust both the January and July instalments accordingly.
5. Keep records showing why you reduced the payment (lower income, fewer clients, business changes), in case HMRC asks for evidence later.

Learning how to reduce payments on account HMRC allows is especially useful for self-employed people whose income fluctuates year to year — for example, if you’ve lost a major client, gone part-time, taken parental leave, or scaled down your business.

When Should You Reduce Your Payments on Account?

You should only reduce your payments on account if you have solid evidence or a strong estimate that your income for the current tax year will genuinely be lower than the previous year. Simply hoping business will slow down isn’t enough — HMRC wants a realistic, good-faith estimate.

Risks of Reducing Payments on Account Too Much

While it’s completely legal to ask HMRC to reduce payments on account, doing so incorrectly carries a real risk. If you reduce your payments on account too aggressively and your income actually stays the same (or increases), HMRC will charge interest on the shortfall from the original due date. This is one of the most common mistakes we see, so if you’re unsure how to reduce payments on account HMRC will accept, it’s worth getting professional advice before making changes rather than guessing.

What Happens If You Don’t Pay Your Payments on Account?

Missing a payment on account deadline doesn’t cancel the amount owed — it simply triggers interest and, in some cases, penalties. HMRC charges daily interest on any Self Assessment payments on account that are paid late, starting from the day after the deadline. If the amount remains unpaid for a long period, HMRC may also apply late payment penalties on top of interest.

If you know in advance that you won’t be able to pay in full, it’s far better to contact HMRC early and discuss a Time to Pay arrangement than to simply miss the deadline and hope for the best. HMRC is generally far more cooperative with taxpayers who reach out proactively.

Tips to Manage Self Assessment Payments on Account Efficiently

Once you understand what is payment on account and how the system works, managing it becomes much easier. Here are some practical tips:

• Set aside money monthly. Rather than scrambling in January and July, put aside a percentage of your income each month specifically for tax.
• Review your figures early. If your income has changed significantly, look into reducing payments on account as soon as you have reliable numbers, not at the last minute.
• Use a separate tax savings account. Keeping tax money separate from your day-to-day business account prevents accidental overspending.
• Get your books done early. The sooner your accounts are finalised, the sooner you know your real tax position and whether adjustments are needed.
• Work with a qualified accountant. A professional can accurately estimate your bill, advise on how to reduce payments on account HMRC will accept, and make sure you never miss a deadline.

Common Mistakes People Make With HMRC Advance Tax Payments

Even once you understand what is payment on account, it’s easy to fall into a few common traps. Here are the mistakes we see most often among self-employed clients and landlords:

• Not budgeting for the January “double payment.” The first time payments on account kick in, you’re paying your balancing payment for last year and your first instalment for this year on the same date. Many people only budget for one of these, not both, and end up scrambling for funds.
• Forgetting the July instalment entirely. Because the second payment on account falls mid-year, away from the busier January deadline, it’s easy to lose track of it until a reminder letter arrives — sometimes with interest already accruing.
• Reducing payments on account without evidence. Cutting your instalments because “things feel slower” without checking real numbers can backfire if your income doesn’t actually fall, since HMRC will charge interest on the shortfall.
• Ignoring the option to reduce payments when income genuinely drops. On the flip side, some taxpayers pay far more than necessary because they never realise they can apply to reduce their HMRC advance tax payment when their circumstances change.
• Mixing up payments on account with the tax return deadline. Submitting your Self Assessment tax return by 31 January does not automatically mean your payment on account has also been reduced or reassessed — the two processes are related but separate, and you may need to actively request a change.

Avoiding these mistakes usually comes down to one thing: reviewing your numbers regularly rather than only thinking about tax twice a year. This is exactly where working with an accountant who understands self assessment payments on account can make a real difference, both for accuracy and for peace of mind.

Payment on Account for Landlords and Multiple Income Streams

Payments on account don’t just apply to sole traders and freelancers — they’re just as relevant for landlords and people with several income sources reported through Self Assessment. If you earn rental income, dividends, or freelance income alongside employment, and your total Self Assessment tax bill exceeds £1,000 with less than 80% collected at source, HMRC will still expect self assessment payments on account from you.

For landlords in particular, rental income can fluctuate from year to year due to void periods, repairs, mortgage interest changes, or property sales. This makes it especially important to review whether your HMRC advance tax payment still reflects reality each year, rather than simply accepting the automatic 50/50 split based on a previous, potentially unusual year. If a tenant left partway through the year or you sold a rental property, for example, your income for the current year could look very different — and that’s precisely the kind of situation where learning how to reduce payments on account HMRC allows can prevent you from overpaying and tying up cash unnecessarily.

Planning Ahead: Making Payments on Account Part of Your Routine

The best way to stop payments on account feeling like a nasty surprise is to build them into your normal financial routine rather than treating them as a one-off event. Once you know what is payment on account and how the twice-yearly cycle works, you can start planning around it the same way you’d plan around any other recurring business cost, such as rent, subscriptions, or insurance renewals.

A simple approach many of our clients use is to review their income every three months, roughly estimate their likely tax bill for the year, and compare that against what they’ve already set aside. This makes both the January and July deadlines far less stressful, because there are no last-minute calculations or scrambling for funds. It also puts you in a much stronger position if you do need to reduce your payments on account, since you’ll already have up-to-date figures to base the request on rather than guesswork.

How Cheap Tax Returns Can Help With Your Payments on Account

At Cheap Tax Returns, we help sole traders, landlords, contractors, and limited company directors across London stay on top of their Self Assessment obligations — including payments on account — without paying high accountancy fees. Whether you need help understanding what is payment on account for the first time, want support calculating your HMRC advance tax payment accurately, or need advice on how to reduce payments on account HMRC will accept based on your current income, our accountants can guide you through the process with clear, fixed-fee pricing and no hidden charges.

We take care of the entire process — from reviewing your income and expenses to submitting your return directly to HMRC — so you always know exactly what you owe, when it’s due, and whether there’s an opportunity to legally reduce your bill.

Final Thoughts on What is Payment on Account

Understanding what is payment on account puts you in a much stronger position to manage your tax affairs with confidence rather than dread. At its core, it’s simply your future tax bill being collected a little earlier, in two manageable instalments, based on a reasonable estimate of your income. The system can feel overwhelming the first time you encounter it — especially when January brings a “double payment” — but once you know how the calculation works, when the deadlines fall, and that you have the option to request a reduction if your income genuinely changes, it becomes a routine part of running your business rather than an unwelcome surprise.

If you’re ever unsure whether your HMRC advance tax payment is accurate, or you think you may be paying more than necessary, it’s always worth getting a second opinion from a qualified accountant before making changes yourself. A small amount of professional guidance can prevent both overpayment and the interest charges that come from reducing your bill too aggressively.

FAQs: What is Payment on Account

What is payment on account in simple terms?

In simple terms, a payment on account is money paid to HMRC in advance towards your next Self Assessment tax bill. It’s based on what you owed the previous year and is split into two instalments, due on 31 January and 31 July.

What are payments on account based on?

Payments on account are based on your previous year’s total Self Assessment tax bill. HMRC assumes your income this year will be similar and asks you to pay 50% of last year’s bill in January and another 50% in July, towards your current year’s liability.

Do I have to pay payments on account every year?

You’ll usually need to make self assessment payments on account every year as long as your Self Assessment tax bill remains above £1,000 and less than 80% of your tax is collected at source through PAYE. If your bill drops below this threshold, you may no longer need to make them.

How do I know if I need to make an HMRC advance tax payment?

Check your most recent Self Assessment tax calculation or your HMRC online account. If your bill was over £1,000 and most of your income wasn’t taxed through PAYE, HMRC will usually schedule payments on account automatically and show them on your statement.

Can I reduce my payments on account if my income has dropped?

Yes. If you reasonably expect your income for the current year to be lower than last year, you can apply through your HMRC online account to reduce your payments on account. Be cautious, though — if you reduce them too much and your income doesn’t actually fall, HMRC will charge interest on the underpaid amount.

What happens if I overpay my payments on account?

If your actual tax bill turns out to be lower than the amount you paid through your payments on account, HMRC will either refund the difference or offset it against your next tax bill, depending on your preference and account settings.

Is payment on account the same as a tax bill?

Not exactly. A payment on account is part of your ongoing tax bill, paid in advance, rather than a separate or additional charge. Combined with your balancing payment, it makes up your full Self Assessment tax liability for the year.