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Compliance20 October 2026·10 min read

Payments on account explained: why your first-year Self Assessment tax bill is bigger

Your first Self Assessment bill is bigger than expected because HMRC asks for the tax you owe plus a first payment on account towards next year, all on one 31 January. This guide explains who pays on account, how the amounts are worked out, a full worked example, and how to reduce the payments if your income has dropped.

If you have just filed your first Self Assessment return and the 31 January demand looks like tax for more than one year, you have read it correctly. HMRC asks first-time filers to pay the full tax bill for the year just ended, plus the first payment on account towards the next year, by the same midnight on 31 January. A payment on account is an advance payment towards your next tax bill. It is not extra tax: it is credited against what you owe later. The shock is in the timing, not the total.

What payments on account are

GOV.UK describes payments on account as payments towards your next tax bill, including Class 4 National Insurance if you are self-employed. They are made in two instalments, and each one is half of the tax you owed last year. They exist to spread the cost of your tax rather than leaving it all to one January.

They are a prediction, not a calculation of what you will actually owe. HMRC assumes your income this year will match last year's, takes last year's bill, and asks for half of it on each of two dates.

What When Amount
Balancing payment for the year just ended, plus first payment on account for the next year 31 January Tax still owed for the year just ended, plus half of that year's bill
Second payment on account 31 July Half of the same year's bill

The first payment on account always falls on the same day as the payment for the year just ended and the filing deadline for it. The payments carry a payment reference: your Unique Taxpayer Reference (UTR) followed by the letter K.

The balancing payment is what is left after you take the payments on account you have already made from the total tax due for the year. It is due by midnight on 31 January after the tax year ends. It also covers any Capital Gains Tax and student loan repayments you owe, according to GOV.UK. Those amounts are settled in the balancing payment rather than being predicted in advance.

Class 2 National Insurance was abolished from April 2024, so it no longer features in the calculation. Class 4 is still included. Making Tax Digital for Income Tax does not change how payments on account work or when they fall due. If you are a sole trader, our guide to Making Tax Digital for sole traders covers what does change.

Who has to make them

Payments on account fall mainly on self-employed people and on people with a significant amount of untaxed income, such as landlords. If most of your tax is collected through a PAYE employer, they usually do not apply.

GOV.UK says you do not have to make payments on account if either of these is true:

  • the tax you owed last year was less than £1,000; or
  • you paid more than 80% of last year's tax outside Self Assessment, for example through your tax code or tax already deducted from savings interest.

The tests look at last year's bill. If your bill falls below £1,000 in a given year, HMRC stops charging payments on account until it rises again.

If you are a company director, the position is different again. Our page on whether company directors need to file Self Assessment explains when a return is needed in the first place.

Why the first year feels so much bigger

A new sole trader has no earlier payments on account to offset. So the first time you file, HMRC asks for two things at once: the full tax for the year, and the first payment on account towards the next one.

GOV.UK gives a clear example. Your tax bill for 2023 to 2024 is £3,000. You made no payments on account the year before. By midnight on 31 January 2025 you pay £4,500: your £3,000 tax bill, plus a first payment on account of £1,500. You then pay a second £1,500 on 31 July 2025.

So a £3,000 bill becomes a £4,500 demand in January, a 50% jump. Scale that to larger numbers and it hurts. If your first bill is £10,000, the first payment on account adds another £5,000 on the same day. People who planned for £10,000 find they need £15,000.

A worked example from first return to second

The figures below use round numbers so the arithmetic is easy to follow.

First January. Your first-year tax bill, including Class 4 National Insurance, comes to £8,000. You owe:

  • £8,000 balancing payment for the year just ended; and
  • £4,000 first payment on account (half of £8,000).

That is £12,000 by 31 January. On 31 July you pay a further £4,000. In total you have paid £16,000 within about seven months, against a tax bill for the first year of £8,000. The extra £8,000 is not lost. It is two payments on account, and they count towards your next tax bill.

Second January. Suppose your income grows and the next year's bill is actually £10,000. You have already paid £8,000 on account, so:

  • balancing payment: £10,000 minus £8,000 = £2,000; and
  • first payment on account for the following year: half of £10,000 = £5,000.

You pay £7,000 by 31 January, then £5,000 on 31 July. GOV.UK sets out a similar case: a £3,000 bill after two payments on account of £900 gives a £1,200 balancing payment plus a £1,500 first payment on account, so £2,700 by 31 January.

If the bill turns out to be lower than your payments on account, the difference is an overpayment. HMRC refunds it, and the overpayment may carry interest.

These examples use the tax years and figures in GOV.UK's guidance. Your own amounts depend on the rates and allowances for the year you are in, so check your latest figures with HMRC or an accountant.

How to check what you owe

Sign in to your HMRC online account, view your latest Self Assessment return and select View statements. You will see the payments on account you have already made and the payments you need to make towards your next tax calculation.

If you file your return early, you will know exactly what you owe. You do not have to pay any earlier, but there is no uncertainty on the day.

What if your income has dropped?

If you know your tax for the current year will be lower than last year's, you can ask HMRC to reduce your payments on account. HMRC's form SA303 gives three grounds:

  • your business profits or other income have gone down;
  • your tax relief has gone up; or
  • the tax deducted at source is more than in the previous tax year.

There are two ways to claim:

  1. Online. Sign in to your HMRC online account, select the option to view your latest Self Assessment return, then select Reduce payments on account.
  2. By post. Send form SA303 to your tax office. You fill it in on screen, then print and post it. Have your HMRC office name and address and your UTR or employer reference ready, because you cannot save your progress.

You must state the amount you expect your tax to be, so HMRC can work out your new payments. You make the claim by 31 January after the end of the tax year, so a claim for the year 2023 to 2024 must reach HMRC by 31 January 2025.

You do not need HMRC's approval before you reduce. You do need a reasonable basis for the figure you give. Situations where reducing makes sense include:

  • your business income is substantially lower;
  • you have stopped trading or are taking a career break;
  • last year included one-off income, such as a large capital gain, that will not recur;
  • you have become employed and are now taxed through PAYE; or
  • you have retired.

An example with a fall in income

Continue the £8,000 example. In the second year you lose your biggest client and expect a tax bill of only £3,000. Without a claim, you would pay £4,000 in January and £4,000 in July, £8,000 in all, and then wait for a £5,000 refund after you file. If you claim a reduction based on an expected bill of £3,000, your payments on account fall to £1,500 each, which matches what you expect to owe.

The risk of reducing too far

Reducing is a claim you make yourself, so the risk sits with you. GOV.UK says that if you reduce your payments on account and your tax bill turns out higher than expected, you will be charged interest on the difference. That interest runs from the original due dates, not from when you filed.

An accountancy example shows how it adds up. A taxpayer cut payments on account from £5,000 to £2,000 each, so £4,000 instead of £10,000. The actual bill was £12,000, so £8,000 was underpaid, with interest running from the January and July due dates.

Also do not reduce simply to ease cash flow. If your income next year is the same or higher, you will owe the same amount, and you have only delayed it. If you are unsure what your income will be, set a figure you can defend and revisit it when your accounts are clearer.

Setting money aside

The most useful habit for a new sole trader is to start saving for tax during the first year, before the first demand arrives. Accountancy firms suggest putting roughly 20% to 30% of each receipt aside if you are a basic-rate taxpayer, and more if you are a higher-rate taxpayer. Those are rules of thumb. Your own figure depends on your profit, so test it against an actual calculation once you can.

HMRC offers some ways to spread the load:

  • Voluntary payments. You can pay money into your Self Assessment account at any time. It is offset against your liability when it falls due.
  • Budget Payment Plan. This is a Direct Debit plan for regular payments towards a future Self Assessment bill. You can pause it for up to six months if you need to. You set it up when you choose Direct Debit payments in your HMRC account.

Keep the money in a separate account so you do not spend it. If you want help with the bookkeeping that feeds these numbers, we describe what we do on our page for accounts and bookkeeping for UK businesses.

If you cannot pay on time

Interest is charged on late payments and on late payments on account, starting from the day after the due date. HMRC publishes the current rate, which changes, so check its rates page for the figure that applies on the day you pay. Late payment penalties also exist, and their rates and timings are set out on HMRC's own penalty pages. Check those pages rather than relying on a summary.

If you cannot pay the full amount, contact HMRC before the deadline about a Time to Pay arrangement. This lets you spread the payment over several months. MCC Partners notes that you must file your return first, that interest is still charged, and that for amounts up to £30,000 you can often set up an arrangement online through your HMRC account.

Frequently Asked Questions

Do I pay payments on account in my first year?

In your first year of filing you have no earlier payments on account to offset, so your first January bill is the full tax for the year plus the first payment on account. GOV.UK sets this out in its worked example.

Are payments on account extra tax?

No. They are advance payments, credited against the bill for the year they relate to. If they are more than the final bill, HMRC refunds the difference.

Can I stop making payments on account?

You can reduce them, even to nil in principle, if you expect no tax liability for the year. You need a reasonable basis, and if the bill is higher than you expect, interest is charged on the difference. They also stop once your bill falls below £1,000, or once you pay more than 80% of your tax outside Self Assessment.

Does HMRC automatically refund overpaid tax?

If your payments on account are more than your final bill, HMRC refunds the difference, and MCC Partners says this is paid after you file. Check your HMRC account to confirm the amount and when it will arrive.

Can I pay my Self Assessment bill in instalments?

The payments on account themselves are the two instalments. If you cannot meet them, ask HMRC about Time to Pay before the deadline.

Sources

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