Payments on account
The HMRC rule that turns a £4,000 tax bill into a £6,000 January shock — and how to plan for it so you're never caught out.
What are payments on account?
Payments on account are advance payments towards your next tax bill. HMRC requires them when your Self Assessment bill exceeds £1,000 and less than 80% of your tax is collected at source (e.g. via PAYE).
Most sole traders hit both conditions. This means every January you don't just pay what you owe — you also pay half of it again as an advance. It's the single biggest cash-flow surprise for people new to self-employment.
The January trap
A sole trader with a £4,000 tax bill will owe £6,000 on 31 January — £4,000 for the year just gone, plus £2,000 as the first payment on account. Without planning, this is a serious cash-flow crisis.
When do payments on account apply?
Your Self Assessment bill exceeds £1,000
Less than 80% of your tax is collected via PAYE
You already make payments on account that cover your bill
This is your first year and your bill is under £1,000
How HMRC calculates the amount
Each payment
50%
of prior year bill
Payments per year
2
Jan + Jul
Total advance
100%
of prior year bill
HMRC uses your previousyear's total tax liability (income tax + Class 4 NI) as the basis. Class 2 NI and any student loan repayments are excluded from the calculation.
The payment cycle
You pay your full Self Assessment tax bill for the previous year PLUS your first payment on account (50% of that bill) towards the current year. This is the payment that catches most sole traders out.
A further 50% of your prior year bill is due. Together with the January payment, HMRC has collected a full year's advance towards your next bill.
HMRC calculates your actual tax for Year 1. If your advance payments were too low, you pay the difference (balancing payment). If too high, you get a refund. The cycle then repeats.
Worked examples
Based on a tax bill of £4,000 in year one.
| Scenario | Actual bill | Due 31 Jan | Due 31 Jul |
|---|---|---|---|
First year filing 31 Jan: £4,000 tax + £2,000 first PoA. Then £2,000 again in July. | £4,000 | £6,000 | £2,000 |
Growing income (bill rises) Prior year PoA covered £4,000. Balancing payment of £2,000 due, plus new £3,000 PoA. | £6,000 | £5,000 | £3,000 |
Quiet year (income drops) PoA overpaid by £500 — HMRC refunds this. New PoA based on lower £1,500 bill. | £1,500 | £-500 | £750 |
Can you reduce payments on account?
Yes — if you know your income this year will be lower than last year, you can apply to reduce your payments on account. This is called claiming to reduce payments on account and is done through your Self Assessment return or via HMRC online.
⚠️ Be careful
If you reduce your payments on account but your income turns out to be higher than expected, HMRC will charge interest on the shortfall. Only reduce if you're confident your income is genuinely lower.
How to plan ahead
- 1
Set aside roughly 30–35% of every payment you receive into a separate savings account — this covers your tax bill and payments on account.
- 2
Use Get Sorted's tax pot feature to calculate exactly how much to save each month based on your current profit.
- 3
Don't wait until January to understand your bill. Check your tax estimate quarterly so there are no surprises.
- 4
If a big January payment is unavoidable, contact HMRC in advance — they can sometimes arrange a Time to Pay agreement.
- 5
Keep receipts and claim every allowable expense. Every £1 of legitimate expenses saves you 20–45p in tax, which directly reduces your payments on account too.
Know your January number before it arrives
Get Sorted calculates your estimated tax bill in real time — including what your payments on account will be — so you can plan your cash flow all year round.
Try Get Sorted free →HMRC source
gov.uk — Understand your Self Assessment tax bill: Payments on accountAlways verify current thresholds and rates directly with HMRC or a qualified accountant.