Payments on account explained: why a first tax bill is one and a half bills.

An employee pays tax every month as the money is earned. Someone in self assessment would otherwise pay nothing until ten months after the tax year had ended. Payments on account close that gap: they are two instalments towards the bill for the year you are in, paid before that bill is known.

Because the real figure is not known, HMRC uses the last one. Each payment on account is half of the tax you owed for the previous year, and that includes Class 4 National Insurance if you are self-employed. The two are due by midnight on:

• 31 January, during the tax year they are for
• 31 July, shortly after it ends

When the return for that year is done, the two payments are set against the real bill. If the bill is higher, the difference is paid by the following 31 January and is called the balancing payment. If it is lower, the difference comes back to you.

They are not an extra tax. Every pound paid on account is taken off the bill it was paid towards. What changes is when you pay, not how much.

Payments on account cover income tax and Class 4 National Insurance only. Capital gains tax, and student loan repayments for the self-employed, are collected in full with the balancing payment.

You have to make them unless one of these is true:

• your last self assessment bill was less than £1,000
• more than 80% of the tax you owed last year was collected outside self assessment, for example through your tax code

The second exception is the one that covers most employees who file a return for a small extra income. If PAYE collected £9,000 of your tax and the return showed another £1,500 to pay, 86% was collected at source and no payments on account are due.

Your self assessment statement and your online account show whether you have payments on account to make, and how much they are.

The first January is the heavy one. Maya pays one and a half years of tax in a single payment, and nothing she could have done on the return would have changed that. From then on the payments settle into a pattern of two a year, and each January carries only the difference between what was paid on account and what the year turned out to cost.

If her 2026 to 2027 bill had been £2,200 and not £3,600, the £3,000 she had paid on account would have been £800 too much. That £800 would be set against the first payment on account for the next year, or paid back.

Payments on account assume that this year will be the same as last. When you know it will be lower, you can ask HMRC to reduce them. GOV.UK gives three reasons:

• your business profits or other income have gone down
• the tax relief you are entitled to has gone up
• more tax is being deducted at source than in the previous year

You can do it in your online account, under the option to reduce payments on account, or by post on form SA303. You give the amount you expect the bill to be, and HMRC works out the new payments from it. The claim has to be made by 31 January after the end of the tax year the payments are for.

Reduce with care. If you lower the payments and the bill turns out higher than you said, HMRC charges interest on the difference, from the dates the full payments would have been due.

A sensible claim rests on figures: the year’s income to date, against the same months of the year before. We do this for clients whose work has dropped, and leave the payments alone where the fall is a guess.

File early

The return can be sent at any time from 6 April. Filing in the spring or summer does not bring the payment date forward. It tells you the January figure, and the July one, while there are still months in which to save for them.

A Budget Payment Plan

HMRC will take a weekly or monthly Direct Debit towards your next bill. You choose the amount, and you can pause it for up to six months. To set one up you have to be up to date with your earlier payments. If the plan has not covered the whole bill by the deadline you pay the difference, and if it has collected too much you can ask for the rest back.

Refunds close to a payment date

If HMRC owes you a refund and you have tax falling due within the next 45 days, such as a payment on account, the refund is set against that tax and is not paid out.

Interest is charged on a payment on account from the day it is late until the day it is paid. HMRC’s late payment rate is the Bank of England base rate plus 4%, which was 7.75% a year when this note was checked.

If you cannot pay in full, contact HMRC before the payment is due. You may be able to set up a payment plan and pay in monthly instalments, based on what you can afford after your living costs.

Under the new penalties that come with Making Tax Digital for Income Tax, late payment penalties do not apply to payments on account, only to the balancing payment and to amounts due after a return is amended. Deadlines and penalties sets out both systems.