Payment on account explained: how it works in 2026/27
Payment on account catches out almost every new freelancer. You file your first tax return, brace yourself for the bill, and then HMRC asks for roughly half as much again on top. It isn't a mistake and it isn't a penalty. It's an advance payment toward next year's tax. Here's exactly how it works, why the first year hurts, and what you can do about it.
What payment on account actually is
Payment on account is HMRC's way of collecting tax from self-employed people closer to when the income is earned. Employees have tax taken from every payslip through PAYE. You don't. So instead of waiting a full year to collect anything, HMRC asks you to pay this year's tax and then pay ahead toward next year in two instalments.
Each payment on account is 50% of your previous year's tax bill. You make one by 31 January and a second by 31 July. The idea is that by the time next year's return is due, you've already paid most of what you'll owe. Then you either top up the small difference or claim a refund if you overpaid.
When it kicks in
You start making payments on account once your Self Assessment tax bill goes over £1,000, as long as less than 80% of your tax was already collected at source. For most freelancers with no PAYE income, that £1,000 threshold is the one that matters. Earn a modest profit and you'll be into the system.
The tax that counts toward the £1,000 is your Income Tax plus Class 4 National Insurance. Class 2 NI, the flat £179 a year, sits outside the payment on account calculation. It's collected with your balancing payment instead.
Why your first January bill is so big
This is the part that stings. In your first full year of self assessment you pay two things at once on 31 January: the full tax bill for the year that's just ended, plus the first payment on account for the year ahead. That first payment on account is 50% of the year that just ended. So your January bill is around 150% of a single year's tax.
Take a freelancer with £37,000 taxable profit. Using our self-employed tax calculator, the Income Tax and Class 4 NI come to about £7,085 (the £179 Class 2 is separate). Here's what lands in that first January:
| Item | Amount |
|---|---|
| Balancing payment for the year just ended | £7,264 |
| First payment on account (50% of £7,085) | £3,543 |
| Total due 31 January | £10,807 |
Then on 31 July, the second payment on account of £3,543 falls due. So across the year you hand over roughly £14,350 against a real tax bill of about £7,264. You're not being overcharged. You're paying this year plus half of next year, and the balance corrects itself later.
How the second year settles down
Year two feels very different. You've already paid £7,086 in advance through the two payments on account. When you file, you deduct what you've paid from what you owe. If your profit stayed roughly the same, you only pay the small balancing amount plus your new payments on account. The double hit only happens once, at the start.
Here's the pattern over three years, assuming steady profit and a rough £7,264 annual bill:
- Year one, 31 January: full bill plus first payment on account (about 150% of a year)
- Year one, 31 July: second payment on account
- Year two, 31 January: balancing payment (small) plus first payment on account
- Year two onward: you're always paying ahead, so each January is manageable
The lesson is simple. Budget for that first year as though your tax rate is half again as high as it really is. Set aside 30% of every invoice from day one and the January bill won't wreck your cash flow.
Reducing your payments on account
You don't have to accept the payments HMRC asks for. If you know your income will be lower next year, maybe you've cut your hours, lost a big client, or moved to part-time, you can apply to reduce your payments on account. You do this through your online account or by filing form SA303.
But be careful. If you reduce your payments and then earn more than you predicted, HMRC charges interest on the shortfall from the original due dates. The current interest rate on late tax is 7.5% a year. So only reduce your payments if you're genuinely confident your income is falling. Guessing low to ease cash flow can cost you.
What happens if you can't pay
Missing a payment on account triggers interest straight away, and if the balance stays unpaid a surcharge follows. If you can't cover the bill, don't just ignore it. HMRC runs a Time to Pay arrangement that lets you spread the amount over monthly instalments, usually up to 12 months. You can set this up online for smaller debts without even speaking to anyone. Interest still applies, but you avoid the harsher penalties.
Common mistakes to sidestep
The biggest error is treating your whole tax bill as spending money until January. By then it's gone and the payment on account makes the shortfall worse. Open a separate savings account and move a fixed percentage across every time you get paid.
Another trap is forgetting that Class 2 NI sits outside the payments on account. It's small, but it's easy to overlook when you're checking your figures against what HMRC has requested. And people often forget the 31 July deadline entirely because it doesn't come with the same publicity as January. Put both dates in your calendar the moment you register.
Want to see your own numbers? Our self-employed tax calculator works out your Income Tax, Class 2 and Class 4 NI and shows the payment on account estimate for 2026/27. And if you're still getting to grips with the basics, the guide to self-employed expenses shows how cutting your taxable profit cuts every one of these payments too.
For the official rules, HMRC sets them out at gov.uk.