Payments on account: why your first proper tax bill is 150% of what you expected

Every year, thousands of sole traders open their first real tax bill and assume HMRC has made a mistake. It says half as much again as the tax they calculated. No mistake — it's payments on account, the least-explained mechanism in Self Assessment.

The mechanism

Once your Self Assessment bill exceeds £1,000 (and less than 80% of your tax is collected at source), HMRC assumes next year will look like this year and collects it in advance: 50% on 31 January, 50% on 31 July. So the first January it applies, you pay this year's bill plus half of next year's — 150% in one hit. Say your 2026/27 bill is £8,000: on 31 January 2028 you owe £8,000 + £4,000 = £12,000, with another £4,000 that July.

The consolation: you're not paying extra, just earlier. Next year's balancing payment is only the difference between what you've prepaid and what's actually due.

When you can reduce them — and when it backfires

Expect lower profits next year (lost a contract, going part-time, big equipment purchase coming)? You can apply to reduce payments on account — in your return or online. Legitimate and sensible. But: reduce them below what the final bill turns out to justify and HMRC charges interest on the shortfall, backdated to the original due dates. Optimistic reductions are a loan from HMRC at their interest rate.

The July trap

The 31 July payment arrives with no return attached and no letter shouting about it — it's the deadline sole traders forget most. If your return for the year is already filed and shows a lower bill, the July payment shrinks automatically; another reason filing early (April–June) is quietly powerful.

The defence

Boring and bulletproof: a separate tax pot, fed a fixed percentage of every payment you receive (~20% at typical profits, more near the higher-rate band), plus a live tax estimate in FreeAgent so the pot tracks reality. Set both up once and payments on account become a transfer between your own accounts. Both are included in every package — along with us telling you the exact number to expect, months ahead.