Payments on account explained: why your January tax bill may be bigger than you expect

Every January, we hear the same surprised question from sole traders and landlords around Orpington, Chislehurst and Bromley: "Why is HMRC asking for more than my tax bill?" The answer is almost always payments on account. They are one of the least understood parts of Self Assessment, and they catch out people in their first or second year of self-employment more than anyone else.

This guide explains how payments on account work, who has to make them, and what you can do now, well before the 31 January 2027 deadline, so the bill doesn't come as a shock.

What are payments on account?

Payments on account are advance payments towards your next year's tax bill. Instead of paying all your tax in one go after the tax year ends, HMRC asks you to pay in two instalments during and just after the year:

• First payment on account: due 31 January, during the tax year it relates to.
• Second payment on account: due 31 July, just after the tax year ends.

Each payment is normally half of your previous year's Self Assessment tax bill. Any difference between what you paid in advance and what you actually owe is settled with a balancing payment, also due on 31 January.

So on 31 January 2027 you may have to pay two things at once: the balancing payment for the 2025/26 tax year, and the first payment on account for 2026/27.

Who has to make them?

You will normally have to make payments on account if your last Self Assessment bill was £1,000 or more. The exception is where at least 80% of your tax was already collected at source, for example through PAYE on a salary or pension. Payments on account cover income tax and Class 4 National Insurance. They do not include Capital Gains Tax or student loan repayments, which are paid with the balancing payment instead.

This is why they matter so much for self-employed people and landlords. If you have no employer taking tax off through PAYE, most of your tax goes through Self Assessment, and once the bill reaches £1,000 the advance payments kick in.

The first-year "double hit"

Here is the situation that surprises people. Imagine you started as a self-employed electrician in Orpington during the 2025/26 tax year, with no earlier Self Assessment history. Your first return is due by 31 January 2027, and say it shows a tax bill of £4,000.

By 31 January 2027 you would need to pay:

• the full £4,000 for 2025/26, because you made no payments on account for that year; plus
• a first payment on account of £2,000 towards 2026/27.

That is £6,000 due on one day, followed by another £2,000 on 31 July 2027. These figures are only an illustration, but the pattern is real, and it is why we encourage new sole traders and landlords to put money aside from day one.

Can you reduce your payments on account?

Yes. Payments on account are based on last year's profit, which may not reflect this year. If your income has fallen, for example because you lost a major contract, took time off, or your rental property stood empty, you can ask HMRC to reduce them. This is done through your HMRC online account or with form SA303, and your accountant can make the claim for you.

Be careful, though. If you reduce them too far and your actual bill turns out higher, HMRC will charge interest on the shortfall. A claim should be based on a realistic estimate of this year's figures, not a hopeful one. This is where up-to-date bookkeeping really helps, because a sensible claim depends on knowing how the year is actually going.

What if your income is going up?

If your business is growing, the opposite applies. Your payments on account will be based on a lower previous year, so your balancing payment the following January will be larger. There is no requirement to increase your payments on account, but it is wise to set aside more than HMRC asks for so you are not caught short.

How Making Tax Digital changes the picture

Making Tax Digital for Income Tax began on 6 April 2026 for sole traders and landlords with qualifying income over £50,000, and it extends to those over £30,000 from April 2027. Quarterly updates do not change when you pay your tax; payments on account and the 31 January and 31 July dates still apply. What MTD does give you is a much clearer view of your profits during the year, which makes it easier to judge whether a reduction claim is sensible and how much to put aside.

Practical steps to take now

1. Check your HMRC online account to see what is due on 31 January 2027 and whether any payments on account are already set.
2. Get your 2025/26 return done early. Filing in November or December, rather than late January, gives you time to plan for the bill.
3. Look at this year's figures. If profit is clearly down, talk to us about whether a reduction is appropriate.
4. Set up a tax savings pot. Many of our clients move a fixed percentage of every invoice or rent payment into a separate account.
5. Consider a payment plan if needed. If you can't pay in full, HMRC's Time to Pay arrangements may help, but it is far better to plan ahead.

How Muftals Accountancy can help

We are a chartered practice (ACCA and CIMA) working with sole traders, landlords, contractors and small limited companies across Chislehurst, Orpington, Bromley, Swanley and the wider BR area. We prepare and file Self Assessment returns, explain exactly what is due and when, and help you decide whether to reduce your payments on account. We work with Xero, QuickBooks, FreeAgent and Sage, so your figures stay current all year.

Book your free first call. Ring us on 020 7078 7546 (Monday to Friday, 9am to 5:30pm) or send us a message, and we will help you get ahead of January.