The second payment on account went out on 31 July. For a lot of sole traders it did not go out at all, because a payment on account is a bill for money you have already spent, calculated from a year that was better than this one.

There is a version of this that costs you a few hundred pounds and a version that costs you nearly a thousand on the same debt, and the difference between them is not whether you have the money. It is what you do in the next few weeks. Here are the actual numbers.

First: file the return anyway

Filing late and paying late are two separate penalty regimes, and you can be hit by both at once. The filing penalties do not care whether you owe anything:

  • £100 the moment the deadline passes, even if the return is one day late and even if the tax due is nil.
  • £10 a day once the return is three months late, up to a maximum of £900.
  • At six months, 5% of the tax due or £300, whichever is higher.
  • At twelve months, another 5% or £300.

A sole trader who owes nothing and files a year late has still built up £1,600 of penalties. There is also a hard practical reason to file: HMRC will not set up a payment plan until the return is in. The return is what tells the system how much you owe. No return, no plan, and the surcharge clock runs anyway.

What paying late actually costs

Two separate charges stack on unpaid tax.

Interest runs from the day after the due date until the balance is cleared. The rate is the Bank of England base rate plus four percentage points, and since 9 January 2026 it has been 7.75% a year, on a base rate of 3.75%. It accrues daily, and it is not cancelled by a payment plan.

Late payment penalties are charged at 5% of the tax still unpaid at 30 days, again at six months, and again at twelve months.

One distinction is worth more than most of this article: the 5% penalties apply to the balancing payment, not to payments on account. A payment on account attracts interest if it is late, but no surcharge. If you are going to pay part of what you owe, the balancing payment is the part to clear first.

The date that cancels the first 5%

If a Time to Pay arrangement is in place within 30 days of the due date, the first 5% penalty is not charged. For the 2025/26 balancing payment due on 31 January 2027, that deadline is 2 March 2027.

Agreeing a plan on 1 March costs nothing in penalties. Agreeing the same plan on 3 March costs 5% of the balancing payment. Nothing else about the arrangement changes.

A worked example

The figures below are illustrative. A sole trader makes £52,000 of profit in 2025/26, having made less the year before.

  • Income tax: £37,700 at 20% is £7,540, plus £1,730 at 40% is £692 — £8,232.
  • Class 4 National Insurance: £37,700 at 6% is £2,262, plus £1,730 at 2% is £34.60 — £2,296.60.
  • Total 2025/26 liability: £10,528.60.
  • Payments on account already made, based on a 2024/25 liability of £8,400: £8,400.
  • Balancing payment due 31 January 2027: £2,128.60.
  • First payment on account for 2026/27, due the same day: £5,264.30.
  • Total falling due on 31 January 2027: £7,392.90.

Now the three ways that bill can go.

Cost of a £7,392.90 tax bill paid late, compared with a Time to Pay arrangement The same £7,392.90 bill. What it costs on top. Illustrative. Interest at 7.75%; surcharges at 5% of the balancing payment only. 3 months late £246 — interest £140 + one 5% surcharge £106 6 months late £497 — interest £284 + two surcharges £213 12 months late £892 — interest £573 + three surcharges £319 Time to Pay, 12 months £310 — interest only, no surcharges Twelve monthly payments of £616.08 instead of one you cannot make, and £582 less in charges than simply not paying for the same twelve months.

Pay nothing for three months. Interest at 7.75% on £7,392.90 for 89 days is £140, plus a 5% surcharge on the £2,128.60 balancing payment of £106. Total £246.

Pay nothing for twelve months. Interest is £573 and three 5% surcharges come to £319. Total £892, and by then HMRC has usually passed the debt to a collection agency.

Set up a Time to Pay plan instead. Twelve instalments of £616.08. Interest still runs, but on a falling balance, so it comes to roughly £310 across the year. No surcharges, because the plan was agreed inside the 30-day window. The same debt, cleared over the same twelve months, for £582 less.

Setting up the plan online

You can arrange it yourself in your HMRC online account without speaking to anyone, provided all of the following are true:

  • Your tax returns are up to date.
  • You owe £30,000 or less.
  • You are within 60 days of the payment deadline.
  • You have no other tax debts and no other HMRC payment plan running.
  • You can clear it within 12 months.

The plan covers the balancing payment, the payments on account and any penalties already on the account. If you owe more than £30,000, need longer than twelve months, or fail any of the other tests, you can still get an arrangement — it just has to be negotiated on the phone. The Self Assessment payment helpline is 0300 200 3822, Monday to Friday, 8am to 6pm. Have your income and outgoings to hand, because a bespoke plan is assessed on what you can genuinely afford.

The other lever: reducing your payments on account

Payments on account are set at half of last year's liability, which is the wrong number whenever this year is worse. If your profits have genuinely fallen, you can apply to reduce them — through your online account or on form SA303.

The trap is that the reduction is a claim, not an estimate you can revise for free. If you reduce below what turns out to be due, HMRC charges interest from the original due dates, as though you had never reduced them, and a reduction made carelessly or deliberately can attract a penalty on top. Reduce to a figure you can defend from actual trading records, not to the figure you can afford. Our post on how payments on account work goes through the mechanics.

Once you are back on top of it, a Budget Payment Plan lets you pay weekly or monthly in advance towards next year's bill by Direct Debit. It only works if your payments are up to date, which is precisely why it is worth setting up the moment they are.

What not to do

  • Do not ignore it. HMRC's own collection process is slower and cheaper than what follows it. Once the debt is with a collection agency you have lost the option of a straightforward plan.
  • Do not reach for a credit card. HMRC does not accept personal credit cards at all, and card debt at 25% or more is expensive money against a 7.75% HMRC charge.
  • Do not borrow without comparing. HMRC at 7.75% with no arrangement fee is cheaper than most short-term business lending. Borrowing to pay a tax bill only makes sense below that rate.
  • Do not spend the VAT. If you are registered, the tax you have collected is not working capital, and a VAT debt on top of an income tax debt is what turns a cashflow problem into a solvency one.

One thing that changes from here

Sole traders with qualifying income over £50,000 came into Making Tax Digital for Income Tax on 6 April 2026, and with it a harsher penalty regime: 3% of the tax outstanding at day 15, a further 3% of what is still outstanding at day 30, and then a charge running at 10% a year on anything unpaid from day 31. The first payments that can attract it are the 2026/27 liabilities due on 31 January 2028.

Under that regime, being a fortnight late costs nothing and being five weeks late costs 6% straight away. The grace period is shorter and the tail is steeper, which makes the payment plan habit worth building now rather than in 2028. Our Making Tax Digital guide for sole traders covers what else changes.

What to do this week

  1. Log into your HMRC account and read the actual figure owed, split between balancing payment and payments on account. Guessing from memory is how people pay the wrong part first.
  2. If a return is outstanding, file it now, even unpaid. It stops the daily penalties and it is the precondition for everything else.
  3. If you can pay part, pay the balancing payment first — that is the only part the 5% surcharges attach to.
  4. If you cannot clear it, set up the online plan while you are still inside the 60-day window and, critically, inside 30 days of the due date.
  5. Work out whether next January's payment on account is genuinely too high. If profits have fallen, reduce it to a defensible figure now rather than discovering the problem in January.
  6. Open a separate account and move a fixed percentage of every payment you receive into it the day it lands. Our sole trader tax guide sets out how much to hold back at each profit level.

Where we help

We file returns early enough that clients know the January figure in the summer rather than in the third week of January, calculate whether payments on account should be reduced from actual figures rather than optimism, and set up Time to Pay arrangements inside the 30-day window so the surcharges never start. Fixed fees from £19 + VAT a month. Get started.