If you’re newly self-employed, there’s a moment coming that catches almost everyone out: your first Self Assessment bill arrives, and it’s half as big again as the number you’d braced yourself for.
Nothing has gone wrong. You’ve just met Payments on Account.
What they are
Payments on Account are advance payments towards your next tax bill. Once your Self Assessment bill goes above £1,000 (and most of your income isn’t taxed before it reaches you, as with employees), HMRC stops waiting a year in arrears for its money and starts asking you to pay as you go:
- 31 January — half of your expected bill for the current tax year
- 31 July — the other half
Each instalment is based on a simple assumption: this year will look like last year, so each half is 50% of your previous bill.
Why the first one hurts
The sting is in the transition. Say your first year of trading produces a tax bill of £4,000. On 31 January you’d pay:
- £4,000 — the bill for the year you’ve just finished, plus
- £2,000 — the first Payment on Account towards the year you’re in now
That’s £6,000 on one day, when you were expecting £4,000. Then another £2,000 the following July. Nobody warns you the first time — which is exactly why we’re warning you now.
The part that makes it fairer
Those advance payments aren’t extra tax — they’re a deposit. When your actual bill is worked out, whatever you’ve already paid is knocked off. If you’ve overpaid, HMRC refunds the difference or sets it against the next instalment.
If you know your income has dropped, you can apply to reduce your Payments on Account rather than funding HMRC’s optimism. Just be honest with the estimate: reduce them below what you actually end up owing and HMRC charges interest on the gap.
How to take the stress out of it
The self-employed people who never worry about January have one habit in common: they put a slice of every payment aside as it arrives — a separate account works well, and for many people 25–30% of profits is a sensible starting point (your own right figure depends on your income and circumstances). The tax money was never “theirs”, so the bill is never a crisis.
That habit is much easier when your bookkeeping is up to date and someone has told you, months in advance, roughly what’s coming — which is a large part of what we do for our clients all year round.
This guide is general information, not advice for your specific circumstances. Tax rules change, and how they apply depends on your situation — if you'd like to talk yours through, we're happy to help.
Quick answers
When are Payments on Account due?
Twice a year — 31 January and 31 July. Each instalment is normally half of your previous year’s tax bill, paid in advance towards the current year.
Why is my first tax bill so much bigger than I expected?
Because the first time HMRC asks for Payments on Account, you pay your full bill for last year plus the first advance instalment for this year — typically one and a half times the tax you were expecting — on the same day.
Can I reduce my Payments on Account?
Yes, if you genuinely expect to earn less this year you can ask HMRC to reduce them. But if you reduce them too far, HMRC charges interest on the shortfall — so it’s worth being realistic rather than optimistic.