Your first Self Assessment bill can be 150% of the tax you were expecting. Not because HMRC has made a mistake, and not because you got the calculation wrong — but because payments on account exist and nobody warned you.
Here is exactly how they work, with the numbers.
What payments on account are
Payments on account are advance instalments towards next year’s tax bill. HMRC assumes you will earn roughly what you earned last year, so it asks for the tax in two chunks rather than waiting a full year for it.
There are two, due 31 January and 31 July. Each one is half of the tax you owed last year, including Class 4 National Insurance if you are self-employed.
They are not an extra tax. Every pound you pay on account reduces what you owe when the real figure is known. But they change the timing dramatically, and the first year is brutal.
When you have to make them
You must make payments on account unless one of these applies:
| Exemption | Test |
|---|---|
| Small bill | The tax you owed last year was less than £1,000 |
| Mostly taxed at source | More than 80% of the tax you owed last year was collected outside Self Assessment — through your tax code, or because your bank already deducted tax on interest |
If either applies, you pay your whole bill on 31 January and nothing else. If neither applies, you are in the system.
The 80% test is the one people forget. An employee with a modest freelance sideline often has most of their tax collected through PAYE, which keeps them out of payments on account even where the total bill is well over £1,000.
The worked example: why the first bill hurts
Take a sole trader whose first full year of trading is 2025/26. Their tax bill for the year — Income Tax plus Class 4 National Insurance — comes to £6,000.
They have budgeted £6,000. Here is what HMRC actually asks for.
| Date | What is due | Amount |
|---|---|---|
| 31 January 2027 | Balancing payment for 2025/26 | £6,000 |
| 31 January 2027 | First payment on account for 2026/27 | £3,000 |
| 31 January 2027 total | £9,000 | |
| 31 July 2027 | Second payment on account for 2026/27 | £3,000 |
£9,000 on 31 January against a £6,000 expectation. That is the 150% shock, and it is entirely normal.
The following year is easier. Suppose the 2026/27 bill turns out to be £7,200:
| Date | What is due | Amount |
|---|---|---|
| 31 January 2028 | Balancing payment for 2026/27 (£7,200 less the £6,000 already paid on account) | £1,200 |
| 31 January 2028 | First payment on account for 2027/28 (half of £7,200) | £3,600 |
| 31 January 2028 total | £4,800 | |
| 31 July 2028 | Second payment on account for 2027/28 | £3,600 |
From year two onwards you are always paying roughly a year’s tax across the year, plus or minus the balancing adjustment. The system only front-loads once.
If you earn less than last year
If your income falls, the payments on account calculated from last year will be too high. You can ask HMRC to reduce them.
Online: sign in to your account, view your latest Self Assessment return, and select ‘Reduce payments on account’.
By post: send form SA303 to your tax office.
Either way, you tell HMRC what you expect to earn and they recalculate.
The risk of reducing too far
This is where it goes wrong. If you reduce your payments on account and your actual bill turns out to be higher than you claimed, HMRC charges interest on the difference — and that interest runs from the original due dates, not from the date you discovered the shortfall.
Late payment interest is currently 7.75%, the Bank of England base rate plus 4%. On a £4,000 under-reduction sitting unpaid from 31 January to the following 31 January, that is a meaningful sum for something entirely avoidable.
The practical rule: reduce payments on account when you have real evidence that income has fallen — a lost contract, a property sold, a business closed — and reduce them to a figure you can defend. Reducing them to zero because cash is tight is not a strategy; it is a deferred bill with interest attached.
If you get the estimate wrong in the other direction and pay too much, you can claim a refund. That is the safer error.
Payments on account and penalties
One useful quirk: late payment penalties do not apply to payments on account. Interest does, but the 5% penalty charges that hit an unpaid balancing payment at 30 days, six months and twelve months are not levied on missed instalments.
That is not permission to miss them. Interest at 7.75% still accrues, the shortfall rolls into the following 31 January, and a pattern of late payment affects how HMRC deals with you. But it is worth knowing that a missed 31 July payment is a smaller problem than a missed 31 January one.
How to plan for them
Three things make payments on account manageable.
File early. You can file a 2026/27 return from 6 April 2027. Filing in April tells you what you owe in January, giving you nine months to put it aside. The payment date does not move.
Use a Budget Payment Plan. HMRC lets you make weekly or monthly Direct Debit payments towards your next bill. You must be up to date with your last payments to set one up, and you can pause for up to six months. Anything paid in reduces what is due on 31 January.
Budget on the full year, not the balancing payment. The mental model that works is: every year I owe roughly one year’s tax, and the first year I owe one and a half. Set aside a percentage of every invoice from the start and the January bill stops being an event.
Frequently asked questions
Why is my first tax bill 150% of what I expected?
Because 31 January brings both your balancing payment for the year just ended and your first payment on account for the current year. The first payment on account is half of last year’s bill, so 100% plus 50% equals 150%.
When do I not have to make payments on account?
If the tax you owed last year was less than £1,000, or if more than 80% of the tax you owed was collected at source — for example through your PAYE tax code. Meeting either test exempts you.
How are payments on account calculated?
Each one is half of the total tax you owed for the previous tax year, including Class 4 National Insurance if you are self-employed. They are due on 31 January and 31 July.
Can I reduce my payments on account?
Yes, online through your HMRC account or by sending form SA303. But if you reduce them below what you actually owe, HMRC charges interest on the difference from the original due dates.
Do late payment penalties apply to payments on account?
No. Interest at 7.75% applies to a late payment on account, but the 5% late payment penalties charged at 30 days, six months and twelve months do not.
Knowing the number early
Payments on account are only a shock when the return lands in late January. File in the spring and the whole thing becomes a budgeting exercise rather than an emergency.
SmartFiling files Self Assessment returns for a fixed fee with a three-week turnaround from receiving your records, so you know your January and July figures with months to spare. Every return is reviewed and signed off by an ICAEW Chartered Accountant.
