Payments on Account Explained for UK Tradespeople — Why Your First Tax Bill Is Bigger Than You Think (2026)

What payments on account actually are

A payment on account is an advance payment toward your next year's self-assessment tax bill. HMRC assumes that if you earned a certain amount this year, you'll earn roughly the same next year — and rather than wait until the following January to collect that tax, they ask you to pay it in advance, in two instalments.

The logic, from HMRC's side, is straightforward: employees have tax taken from every payslip throughout the year via PAYE, so the Treasury gets a steady flow. Self-employed people pay in one or two lump sums after the year ends. Payments on account are HMRC's way of pulling some of that money forward so the self-employed are paying tax closer to when they earn it — much like an employee does.

Each payment on account is 50% of your previous year's income tax and Class 4 National Insurance liability. You make two of them, so across the two instalments you pre-pay an amount equal to 100% of last year's bill toward the coming year. It only feels like a shock the first time, because the first time you're paying last year's bill and starting the advance payments at the same moment.

The worked example everyone needs

Numbers make this far clearer than words. Let's say it's your first year self-employed as, say, a plumber. After deducting your allowable expenses, your total bill for income tax plus Class 4 National Insurance for the year comes to £5,000. Here's what actually happens.

On 31 January, you pay:

• The £5,000 balancing payment — the actual tax due for the year that just ended, and
• A first payment on account of £2,500 (50% of last year's £5,000 bill) toward the coming year.

That's £7,500 due on 31 January — the figure that causes the panic. The bill is 150% of the tax you thought you owed.

Then on 31 July, you pay:

• A second payment on account of £2,500 (the other 50%) toward the coming year.

So across the year you've handed HMRC £10,000 in total. But £5,000 of that is advance credit sitting against next year's bill. You haven't paid double the tax — you've paid this year's tax in full, plus pre-paid next year's tax in two halves. When next January comes, that £5,000 of payments on account is deducted from whatever you actually owe.

The shock is purely a timing problem. The first year you're effectively catching up — paying one full bill in arrears and starting the advance system in the same breath. After that, it smooths out, as you'll see below.

The two deadlines

There are only two dates to remember, and they never change:

• 31 January — your balancing payment for the tax year that ended the previous April, plus your first payment on account toward the current year.
• 31 July — your second payment on account toward the current year.

Each payment on account is 50% of the previous year's income tax and Class 4 National Insurance liability. Miss either deadline and HMRC starts charging interest from the day after the due date — more on that below. Set both dates in your calendar the moment you go self-employed; the July payment in particular is the one people forget about because it falls in the middle of summer when tax is the last thing on your mind.

When payments on account are NOT required

Not everyone has to make payments on account. There are two genuine exemption conditions, and either one on its own gets you off the hook:

• Your last self-assessment tax bill was less than £1,000. If you owed under a grand for the year, HMRC doesn't bother asking for advance payments.
• More than 80% of your tax was already collected at source. If most of your tax has already been deducted before the money reached you — for example through PAYE on an employment, or through CIS deductions — you don't make payments on account.

That second exception matters enormously for trades, and it's the one most people don't realise applies to them.

Why CIS subcontractors often escape payments on account

If you work as a subcontractor under the Construction Industry Scheme (CIS), the contractor who pays you deducts 20% from your labour before you ever see the money, and hands it directly to HMRC. By the time your tax year ends, a large chunk of your tax has already been paid for you — often more than 80% of your total liability. Because that tax was collected at source, it counts toward the 80% rule, which can reduce or completely remove your obligation to make payments on account.

How CIS interacts with payments on account

CIS changes the picture significantly. As a registered subcontractor, 20% is deducted from your labour payments at source (it's 30% if you're not registered, which is one of many reasons to register). Those deductions are treated as advance payments of your income tax and Class 4 National Insurance — exactly the same money, just collected earlier.

When you complete your self-assessment, you add up all the CIS deductions made over the year and set them against your total bill. Two things commonly happen:

• Because so much tax was taken at source, you clear the 80% threshold and aren't asked to make payments on account at all.
• In many cases the 20% deducted is actually more than your final liability once expenses, the personal allowance and the Class 4 threshold are taken into account — so you're due a refund rather than a bill.

This is why CIS subcontractors frequently get a tax rebate while a directly self-employed tradesperson on the same earnings faces a payment on account. Same income, very different January experience — purely because of how the tax was collected.

The following years — it smooths out

The first year is the hard one. Once you're inside the system, the rhythm becomes much more manageable, because you're always part-way ahead.

Each January you pay a balancing payment — the difference between what you actually owed for the year and the two payments on account you've already made — plus the first payment on account for the next year. If your income stays roughly flat, the balancing payment is small or zero, because the advance payments already covered most of the bill. If you earned more, you pay the extra; if you earned less, you may have overpaid and get credited back.

The mental shift is realising you're never again paying a full year's tax in one go from a standing start. You're always topping up. Once that clicks, January stops feeling like an ambush and starts feeling like a routine top-up payment.

Reducing your payments on account

Payments on account are based on the assumption that next year looks like last year. Sometimes you know that isn't true — you're winding down toward retirement, you're taking time off, you had an unusually strong prior year, or work has genuinely slowed. In those cases you can apply to HMRC to reduce your payments on account to better match what you expect to actually owe.

This is a real and legitimate option, and for someone whose income is genuinely dropping it can free up serious cash. But there's a trap. If you reduce your payments on account too far — below what you turn out to actually owe — HMRC charges interest on the shortfall, backdated to the original due dates. You don't get a free pass for guessing low.

The trade-off, then, is this: reduce them if you have a sound, honest expectation that your income is genuinely lower, and base the reduction on a realistic forecast rather than wishful thinking. Don't reduce them simply because the bill is inconvenient — that just defers the pain and adds interest on top. If you're unsure, reduce conservatively or speak to an accountant.

Interest and penalties for paying late

HMRC charges interest on any tax paid late, including late payments on account, at their published rate. Interest accrues daily from the day after the due date until the day you pay, so even a few weeks late adds up. On top of interest, the balancing payment carries late-payment penalties if it remains unpaid 30 days, 6 months and 12 months after the deadline.

The practical takeaway is simple: pay both instalments on time, and don't under-reduce your payments on account in the hope of holding onto cash. Reducing them below your real liability triggers interest on the difference, so the "saving" is illusory. Treat the deadlines as immovable and the figures as honest, and you avoid the whole problem.

How to budget for it

This is the part that actually keeps you out of trouble. The rules above are just mechanics — survival comes down to habit. Here's the practical advice every self-employed tradesperson should follow:

• Set aside roughly 25–30% of your profit for income tax and National Insurance, every time you get paid. Not turnover — profit, after expenses. This covers a typical bill for most sole traders.
• In your first year, set aside extra. Remember you'll owe your full bill plus a 50% payment on account on 31 January, and another 50% on 31 July. Budgeting only for the headline tax figure is exactly what causes the January shock. Aim higher in year one.
• Treat the tax pot as untouchable. The money you set aside isn't yours — it's HMRC's, sitting in your account temporarily. The single most reliable way to protect it is to ring-fence it in a separate bank account you don't spend from. Out of sight, out of temptation.
• Use HMRC's Budget Payment Plan. If you're up to date with your self-assessment, you can set up a Budget Payment Plan to pay weekly or monthly toward your next bill by Direct Debit. It turns one terrifying lump sum into small, predictable payments, and the balance is offset against what you owe in January.

The combination that works: ring-fence the tax money the moment it lands, and drip-feed it to HMRC through a Budget Payment Plan so January and July are non-events rather than crises.

Quick Reference: Payments on Account Timeline

Using the worked example — a first-year bill of £5,000 in income tax and Class 4 National Insurance — here's how the payments fall over two years assuming income stays roughly flat.

Notice how the year-2 January figure (£2,500) is a third of the year-1 figure (£7,500). That's the "catch-up" effect of the first year unwinding — once you're in the system and your income is steady, the balancing payment shrinks toward zero and you're mostly just paying the advance instalments.

These figures are illustrative only. Always check your own numbers on GOV.UK or with your accountant — your personal allowance, expenses, other income and the current tax and Class 4 thresholds will all affect your actual bill.