Payments on Account Explained: Why Your January Tax Bill Is So High

You finish your Self Assessment return expecting one tax bill, then HMRC asks for half as much again by 31 January and another payment by 31 July. It feels like you are being charged twice.

Usually, you are not. The January bill often combines two different things: the tax still due for the year you have just filed, plus the first advance instalment towards the current year. The July bill is the second advance instalment. HMRC calls these advance instalments payments on account.

The practical answer is this: if your sole-trader profits stay broadly similar, the first January after you enter the payments-on-account cycle is normally the painful one. After that, the advance payments you make in January and July are credited against the next bill.

That does not make the cash-flow hit easy. It does make it easier to plan for.

What are payments on account?

Payments on account are advance payments towards your next Self Assessment bill. If you are self-employed, they include Income Tax and Class 4 National Insurance. They are normally due in two instalments:

• 31 January: the first payment on account
• 31 July: the second payment on account

Each instalment is usually half of the previous year's relevant tax bill. HMRC uses the previous year because it does not have a live forecast of what you are earning now.

That prior-year calculation works reasonably when profits are steady. It can feel wrong when your business changes quickly. A good year can create advance payments that feel too high if the next year drops. A poor year can leave you with a balancing payment if the next year rises.

Why January can look 50% too high

Say your 2026/27 sole-trader profit is £40,000. For this example, assume you live in England, Wales or Northern Ireland, have the standard Personal Allowance, no student loan, no capital gains and no other income. Scottish Income Tax bands are different, so the Income Tax part would differ for Scottish taxpayers.

Using the 2026/27 Income Tax rates and self-employed National Insurance rates:

• Income Tax on £40,000 profit is £5,486.
• Class 4 National Insurance is £1,645.80.
• The relevant total is £7,131.80.

If this is your first time in the payments-on-account cycle, the amount due by 31 January 2028 is not just £7,131.80. It is:

• £7,131.80 for the 2026/27 tax year, plus
• £3,565.90 as the first payment on account for 2027/28.

That makes the January payment £10,697.70. A second payment on account of £3,565.90 is then due on 31 July 2028.

The following January is where the cycle starts to make sense. If your 2027/28 profit is also £40,000, the two payments on account already made total £7,131.80. They match the 2027/28 bill. On 31 January 2029 there is no balancing payment for 2027/28. You only pay the first payment on account for 2028/29.

The first January feels like a shock because you are catching up and paying ahead at the same time.

Who has to make payments on account?

You normally make payments on account unless one of these tests saves you:

• Your relevant tax bill for the previous year was below £1,000.
• More than 80% of your tax was already collected outside Self Assessment, for example through PAYE.

The second test matters for side-hustlers. A person with a salary and freelance income can have a Self Assessment bill above £1,000 and still avoid payments on account if enough tax has already been collected at source.

For example, assume your total Income Tax and Class 4 National Insurance for the year is £8,000. Your employer has already collected £6,800 through PAYE. That means 85% has been collected at source. Even if your Self Assessment balance is £1,200, payments on account should not be due because the 80% test has been met.

HMRC's legal manual explains this as a "relevant amount" calculation, after tax deducted at source. It also confirms that each payment on account cannot exceed 50% of that relevant amount. The public GOV.UK page is easier to read, but the HMRC manual is useful for the edge cases.

What payments on account include

For most sole traders, payments on account cover:

• Income Tax due through Self Assessment
• Class 4 National Insurance

They do not cover everything on a tax return. HMRC excludes capital gains tax and student loan repayments from the payments-on-account calculation. Those are paid through the balancing payment on 31 January after the tax year.

Class 2 National Insurance is also outside the payments-on-account calculation. For 2026/27, Class 2 rules are different from the old compulsory weekly charge for many self-employed people, but the practical point remains: do not assume every line on your Self Assessment calculation feeds into the January and July advance payments.

If your return includes capital gains, student loans, Scottish rates, pension relief, employment income or more than one trade, check the calculation carefully. A qualified accountant can help if the numbers do not trace through cleanly.

What happens when profits rise

Payments on account do not predict a better year. They start from the last filed year.

Use the £40,000-profit example again. You paid two instalments of £3,565.90 towards 2027/28, based on the earlier bill. Then your 2027/28 profit rises to £55,000.

Using the same 2026/27 baseline rates for illustration, total Income Tax and Class 4 National Insurance would be £11,788.60. You have already paid £7,131.80 on account, so the balancing payment is £4,656.80.

Your next first payment on account is then half of the new relevant amount: £5,894.30.

That January bill becomes:

• £4,656.80 balancing payment for 2027/28, plus
• £5,894.30 first payment on account for 2028/29.

Total due: £10,551.10.

That number is high for a different reason. It is not the first-year catch-up problem. It is the cost of a better year showing up after HMRC had used last year's lower profit as its estimate.

What happens when profits fall

If your profits fall, HMRC's prior-year estimate can overstate what you are likely to owe. You may be able to claim to reduce payments on account.

Take the same starting point: prior-year relevant liability of £7,131.80, creating two payments on account of £3,565.90 each.

Now assume the next year's profit drops to £20,000. On the same England, Wales and Northern Ireland assumptions, the Income Tax and Class 4 National Insurance would be £1,931.80. A realistic pair of payments on account would be £965.90 each.

In that situation, a reduction claim may make sense. HMRC says you can apply where:

• business profits or other income go down
• tax relief goes up
• tax deducted at source is higher than in the previous tax year

You can apply online or by form SA303. The claim deadline is 31 January after the end of the tax year in question.

The important part is the estimate. HMRC's Self Assessment Manual says the expected liability is your total estimated Income Tax and Class 4 National Insurance for the year across all sources, including higher-rate tax and any new source of income.

So do not reduce payments just because turnover in one trade has fallen. Look at the whole year. If you lost a contract but started employment, received more investment income, took on property income or moved into higher-rate tax, the reduction may be smaller than it first appears.

If you reduce too far and the final bill is higher than expected, HMRC charges interest on the shortfall from the original due date. HMRC's enquiry manual says penalties are aimed at careless, fraudulent or abusive reduction claims rather than ordinary estimates that prove wrong. Interest is the normal risk; penalties are about bad claims.

Can you reduce the July payment?

Sometimes, yes.

If you have just finished a lower-profit tax year and the 31 July payment is still based on an older, higher year, filing the completed return before 31 July can update HMRC's view. That may reduce the July amount without a separate estimate.

This is one reason early filing helps even if you do not pay early. It gives you the real number sooner.

If the fall relates to the current tax year rather than the year you have just filed, you may still need a reduction claim. Keep a short note of the calculation you used. If HMRC or an accountant asks later, you want to show that the claim came from a reasoned estimate, not a hopeful guess.

What if your statement and calculation disagree?

HMRC has two things that can look similar when you are stressed:

• Your Self Assessment statement, which shows what HMRC says is due on your account.
• Your tax calculation, often called the SA302, which shows how the year's tax has been worked out.

If you file close to the deadline, HMRC says your statement may not appear before the payment deadline. The SA302 guidance also says you may need to save or check the calculation before submission if payment is due while the online view catches up.

This can create a confusing moment where one screen looks empty and another shows tax due. Do not assume "no statement yet" means "nothing to pay". Check your online account, payment history and submitted calculation. If the figures still do not line up, ask HMRC before the deadline rather than waiting for interest to answer the question.

What if you cannot pay by 31 January or 31 July?

If the bill is not yet due, you can spread payments yourself. HMRC says you can make one-off payments before the deadline, or set up a Budget Payment Plan if you are up to date with previous Self Assessment payments.

If the bill is already due and you cannot pay in full, HMRC may let you set up a payment plan, often called Time to Pay. HMRC checks whether the plan is affordable.

Late payment has a cost. HMRC charges interest from the due date. As of 27 June 2026, the published late payment interest rate is 7.75%, effective from 9 January 2026. That rate is linked to wider interest-rate changes, so check the current rate before relying on it.

Late-payment penalties are separate from interest. GOV.UK lists late-payment penalties of 5% of the unpaid tax at 30 days, 6 months and 12 months. Late filing penalties are a different set of charges, starting with £100 for a late return, so it is worth filing even if you cannot pay everything at once.

How to plan for payments on account

The rule is mechanical. Your habits need to be practical.

First, file early where you can. You can submit a Self Assessment return after 6 April for the tax year just ended. Filing early does not bring the payment deadline forward, but it gives you the number months earlier.

Second, treat 31 July as a real tax date, not an afterthought. Many sole traders remember January because the return deadline is everywhere. July is quieter, but it can still be a large payment.

Third, keep a tax pot based on current profit, not last year's HMRC estimate. If your income is rising, last year's payments on account may be too low. If your income is falling, check whether a reduction claim is justified instead of draining cash you need for the business.

Fourth, keep enough context around your records to estimate sensibly. A running view of income, expenses and tax helps you decide whether HMRC's prior-year assumption is still fair. Solas can help you capture receipts, organise income and expenses, and keep your records ready for review. Bank feeds and direct HMRC submissions are coming soon.

Quick answers

Am I paying tax twice?

No. The January bill can contain last year's unpaid tax and the first advance payment towards the current year. The advance payments are credited against that current year's final bill.

Do payments on account include student loan repayments?

No. HMRC excludes student loan repayments from the payments-on-account calculation. They are settled through the balancing payment.

Do payments on account include capital gains tax?

No. Capital gains tax is part of the balancing payment, not the January and July advance-payment calculation.

Can PAYE income stop payments on account?

Yes, if enough tax has already been deducted at source. More than 80% of the relevant tax must have been collected outside Self Assessment.

Can HMRC collect the bill through my tax code?

Sometimes. GOV.UK says you can pay through your PAYE tax code only if the bill is below £3,000, you already pay tax through PAYE, and you file early enough: paper by 31 October or online by 30 December. This route does not remove payments on account for everyone, but it can matter for mixed-income taxpayers.

Should I reduce payments on account if income has dropped?

Possibly. Use a full-year estimate across all income sources, not just the trade that has fallen. If the numbers are material or your income mix is complicated, ask a qualified accountant.

What happens if I miss 31 July?

Interest starts from the due date. Late-payment penalties can follow if the tax remains unpaid at 30 days, 6 months and 12 months. If you cannot pay, contact HMRC rather than ignoring it.

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This article was researched and published in June 2026. Tax rules, rates and HMRC processes can change. While we have checked the main official sources, this is general information rather than tax advice. If your situation is complex, speak to HMRC or a qualified accountant or tax adviser.