Self-Assessment payments on account: what they are and how to reduce them

What are Self-Assessment Payments on Account?

If you're registered for Self-Assessment, you might be required to make payments on account. These are advance payments towards your next tax bill, covering Income Tax and Class 4 National Insurance contributions (NICs). They help spread your tax liability throughout the year.

You'll generally need to make payments on account if your last Self-Assessment tax bill was over £1,000 and less than 80% of your tax was collected through Pay As You Earn (PAYE) at source. This often applies to sole traders, contractors, landlords, and company directors who receive dividends.

Your total tax bill for the year is usually split into three payments:

• First payment on account: Due by 31 January (for the tax year just ended).
• Second payment on account: Due by 31 July (for the tax year just ended).
• Balancing payment: Due by 31 January of the following year. This covers any remaining tax you owe for the previous tax year, plus your first payment on account for the next tax year.

How Payments on Account are Calculated

Each payment on account is typically 50% of your previous year's total tax bill. HMRC calculates this based on the tax return you submitted for the prior tax year.

Let's look at an example: Suppose your total tax bill for the 2025/26 tax year (submitted by 31 January 2027) was £4,000.

1. First payment on account for 2026/27: £2,000 (due 31 January 2027).
2. Second payment on account for 2026/27: £2,000 (due 31 July 2027).

When you submit your 2026/27 tax return by 31 January 2028, you'll calculate your actual tax liability for 2026/27.

• If your actual tax for 2026/27 was £4,500, you've already paid £4,000 through payments on account. You would then owe a balancing payment of £500.
• At the same time, you would also make your first payment on account for the 2027/28 tax year, which would be 50% of your 2026/27 tax bill (i.e., 50% of £4,500 = £2,250).

It's important to note that payments on account do not include student loan repayments or Capital Gains Tax. These are paid as part of your balancing payment.

Reducing Your Payments on Account

If you expect your income to be significantly lower in the current tax year than it was in the previous year, you can apply to reduce your payments on account. This is a common scenario for small business owners, contractors, or landlords whose circumstances change.

Reasons you might reduce your payments on account include:

• You expect your profits to decrease.
• You've stopped trading or letting property.
• You anticipate higher tax-deductible expenses.
• You expect to receive more income through PAYE, reducing your Self-Assessment liability.
• You qualify for new tax reliefs or allowances.

How to apply for a reduction

You can apply to reduce your payments on account online through your HMRC online account, or by post using form SA303. You'll need to estimate your expected tax liability for the current tax year.

Be careful when estimating your reduced income. If you reduce your payments on account too much and end up owing more tax than you predicted, HMRC may charge you interest on the underpaid amount. In some cases, penalties could also apply if HMRC believes you deliberately underestimated your income.

It's always best to be realistic and, if in doubt, consult your accountant. They can help you make an accurate estimate and ensure you don't face unexpected charges.

Common mistakes

• Forgetting the July deadline: Many taxpayers remember the January deadline but overlook the 31 July payment on account. Missing this can lead to interest charges.
• Underestimating income: Reducing payments on account based on an overly optimistic view of lower income can lead to a larger balancing payment and interest charges later.
• Not understanding the calculation: Some taxpayers mistakenly believe payments on account are for the current tax year's estimated income, rather than being based on the previous year's actual liability.
• Ignoring changes in circumstances: If your income significantly increases, you might need to adjust your financial planning to cover a larger balancing payment and higher payments on account in the future.