Payments on Account Explained — Why Your First Tax Bill Feels Double (2026)

What Are Payments on Account?

Payments on account are HMRC's way of getting you to pay next year's tax in advance, in two instalments. The logic is that an employed person has tax taken from their wages every month through PAYE, so HMRC receives it steadily across the year. A self-employed tradesperson pays in one lump after the year ends — so to even things up, HMRC asks you to make advance payments towards the following year's bill.

Each payment on account is 50% of your previous year's tax bill. The first is due on 31 January (the same day as your balancing payment for the year just gone), and the second is due on 31 July. So across a normal year you make two payments, six months apart, each worth half of last year's liability.

Payments on account cover your Income Tax and Class 4 National Insurance. They do not include Class 2 National Insurance or anything owed under the Construction Industry Scheme reconciliation — those are settled separately in the balancing payment.

Why Your First Self Assessment Bill Feels Double

Here's the part nobody warns you about. In your very first January under Self Assessment, you don't just pay the tax you owe for the year that's ended — the balancing payment. You also have to make your first payment on account for the year that's already running. Because that first payment on account is 50% of the bill you just settled, you end up paying 150% of your tax bill all at once in that first January.

Let's put real numbers on it. Say your first full year of self-employment leaves you with a tax bill of £4,000 (Income Tax plus Class 4 NIC). Here's what actually lands:

• 31 January: £4,000 balancing payment for the year just gone, PLUS £2,000 first payment on account (50% of £4,000) = £6,000 due
• 31 July: £2,000 second payment on account (the other 50%) = £2,000 due

So in the space of seven months you pay £8,000 against a year where your actual liability was £4,000. You're not being overcharged — the extra £4,000 is simply next year's tax paid in advance. The following January your balancing payment will be reduced by the £4,000 you've already paid on account, so it evens out. But that first hit is brutal if you haven't budgeted for it, and it's the single most common reason newly self-employed trades get into trouble with HMRC.

When Payments on Account Don't Apply

There are two thresholds where HMRC won't ask you for payments on account at all. If either applies to you, you only pay the balancing payment and nothing extra in advance.

• Your last Self Assessment bill was under £1,000. If the total tax you owed for the year was less than £1,000, HMRC doesn't bother with payments on account — the amounts are too small to matter to them. You just settle the bill and move on.
• More than 80% of your tax was already collected at source. If at least 80% of your tax for the year was deducted before it reached you — through PAYE on an employed job, or through CIS deductions as a subcontractor — you fall under the 80% rule and payments on account don't apply, even if your bill was over £1,000.

That second threshold is genuinely important for trades, because so many of you work under the Construction Industry Scheme where tax is taken from your payments before you ever see them.

How CIS Deductions Interact With Payments on Account

If you're a CIS subcontractor, contractors deduct 20% from your labour payments (or 30% if you're not registered) and pay it straight to HMRC on your behalf. This is tax paid in advance throughout the year — and it changes the payments-on-account picture completely.

Because that 20% is already sitting with HMRC, it counts as tax collected at source. For many subcontractors whose income is mostly labour, the CIS deductions cover most or all of their Income Tax liability. That can push you over the 80% threshold, meaning payments on account don't apply to you at all. In a lot of cases CIS deductions don't just reduce your payments on account — they wipe them out entirely, and frequently produce a refund because too much was deducted at source relative to what you actually owe after your expenses and allowances.

This is why CIS subcontractors should always file their Self Assessment as early as possible after the tax year ends on 5 April. If you're due a refund, there's no reason to wait until January to claim it — that's your money sitting with HMRC.

Reducing Your Payments on Account

Payments on account are based on the assumption that next year's income will be the same as last year's. But trade income is rarely flat. If you know your income has dropped — you've lost a major contractor, taken time off through injury, or scaled back — you don't have to pay an advance based on a year you're not going to repeat.

You can make a claim to reduce your payments on account. This is done online through your HMRC Self Assessment account, or on paper using form SA303. You tell HMRC what you expect your tax bill to be for the coming year, and they recalculate the two instalments accordingly. It's a simple process and it can free up significant cash flow if your earnings really have fallen.

But there's a trap. If you reduce your payments on account too far — paying less than you actually end up owing — HMRC charges interest on the shortfall, backdated to the original due dates. So this isn't a tool for delaying payment when business is fine; it's only for when income has genuinely dropped. Reduce based on a realistic estimate, not on optimism, and keep some headroom. Underestimating costs you interest; a sensible reduction saves you money.

The Key Dates and What Happens If You're Late

There are three things to keep straight: the balancing payment, and the two payment-on-account dates.

• Balancing payment: the difference between what you actually owed for the year and what you've already paid on account. Due 31 January after the tax year ends.
• First payment on account: 50% of last year's bill, due 31 January.
• Second payment on account: the other 50%, due 31 July.

Miss a payment-on-account deadline, or pay less than you owe at the balancing stage, and HMRC charges interest from the due date until you pay. Interest is calculated daily, so even a short delay adds up. If you can't pay in full, the worst thing you can do is ignore it — interest keeps running and HMRC can escalate.

Two options let you spread the cost. A Budget Payment Plan lets you pay weekly or monthly into your account ahead of the deadline, building up a balance so the January and July dates don't sting — this is voluntary and you set it up while your account is up to date. If you're already struggling to pay a bill that's due, a Time to Pay arrangement lets you spread the amount you owe over agreed monthly instalments. You can often set up a Time to Pay plan online for smaller debts, or by phone for larger ones. Interest still applies, but you avoid the harsher consequences of simply not paying.

Worked Example: What's Due and When

This table walks through the £4,000-bill example so you can see exactly how a first January doubles up and then settles down in following years. It assumes your income stays roughly level.

Notice how Year 1 lands £8,000 across two payments while Year 2 settles back to £4,000. The system never actually charges you more than you owe — it just front-loads the pain into your first January. Once you're through it, you're always a year ahead.

Practical Advice: Don't Spend the Tax

The single most useful habit for any self-employed tradesperson is to set money aside the moment it comes in. A common rule of thumb is to move 25–30% of every payment into a separate savings account the day you're paid, and never touch it. When January comes, the money is already there and the bill — payments on account included — is something you fund, not something that funds itself by surprise.

If you're a CIS subcontractor, remember that 20% has already gone to HMRC, so you can set aside a little less — but still keep a buffer, because your Class 4 NIC and any income above the basic rate won't be covered by CIS deductions alone.

Use an accountant for your first couple of years. A good accountant will tell you about payments on account before that first January, claim every expense you're entitled to, get your CIS refund processed quickly, and make sure you don't reduce payments on account so far that you cop interest charges. Their fee is usually a tax-deductible expense and they routinely save you more than they cost.

Above all, treat the tax you owe as money that was never yours. Don't spend it on tools, a van or a quiet month — it belongs to HMRC and it's coming due. Tradespeople who internalise that one principle almost never have a tax problem.

The Bottom Line

Payments on account aren't a penalty or a trick — they're just HMRC asking you to pay next year's tax in two advance instalments because you don't have PAYE doing it for you. The reason your first bill feels double is that you pay last year's balancing amount and the first 50% advance on the same day. If your bill was under £1,000, or more than 80% of your tax was taken at source through PAYE or CIS, you escape them entirely. If your income drops you can reduce them — carefully. And if money's tight, a Budget Payment Plan or Time to Pay arrangement can spread the cost. Know the dates, set the money aside, and that first January stops being a shock.