Payment on account explained: How to avoid surprises on your tax bill

Ercan Demiralay FCCA explains the concept of payment on account and how it works with your tax return.

You’ve filed your tax return. You’ve seen the number. Now comes the part no one enjoys, actually paying the bill!

This is a crucial concept and mechanism you need to understand, especially if you’re self-employed, a landlord, or where your tax isn't deducted at source. It’s called payment on account and it can catch people off guard.

By reading this blog you'll find out what this means, how it works, and how you can avoid being potentially stung by an unexpected balancing payment. Most importantly, you'll also likely understand how HMRC have calculated the bill that's presented on the final page of your return.

In this post we cover specifically:

So far reasonably simple, but there are many aspects and rules to this and that means it can get quite complicated.  This is why you need a good understanding of all this in order to:

• Submit your tax return information early, to allow time for planning and identifying potential tax savings
• Set money aside regularly in order to fulfil your tax and national insurance liabilities by the required deadlines

2. When do you pay, and how does it work? 

HMRC splits your tax bill into 2 significant advance payments:

• 31 January - first POA (50% of last year's bill)
• 31 July - second POA (the remaining 50%)

Doing so spreads your payments out over the course of the calendar year. It helps the Exchequer too. They receive, in effect, a forward payment by the summer. If you owe £50,000 in tax for the first time under self assessment for the 2025/26 tax year then HMRC expects £25,000 by 31 January and the remaining £25,000 at the end of July.

Unfortunately there's a catch. Remember these aren't payments for the year you've already filed. They're advance payments for the next tax year. That's where confusion can arise as you can feel like you're being asked to pay twice. 

3. The balancing payment (where people can get caught out)

We'll use an example to help you with this. Be sure to reference the diagram to aid your understanding.

Tom is a IT contractor and per the prior section his first full year of self assessment was a really good one.

• 2025/26 tax bill = £50,000
• This was paid on 31 July 2027 which was his first ever self assessment payment

The total tax he owes for 2026/27 is £70,000 based on his 2025/26 tax return. That means he has an outstanding balance of £20,000 which is calculated on the £70,000 owed minus the £50,000 paid by 31 July 2027. This is the balancing payment and it's due for Tom on 31 January 2028. He'll also owe his first payment on account for the next year on that same date.

This means January can be a financially brutal month unless you're prepared! So, it's absolutely vital that you understand the cash flow impact. 

4. Who doesn't have to make POA?

Not everyone gets dragged into this system. 

You won’t have to make two payments in the year if:

• You’ve already paid 80% or more of the total amount of tax you owe
• Your total bill came in at £1,000 or less

This is likely to be the case if you're both employed and self-employed. This means you could have a full time job but also be a part-time freelancer with most of your income coming through your employer. 

If you’re fully self-employed, a landlord, a director taking dividends, or someone with unpredictable income—chances are, POA will probably apply to you.

5. How to reduce payments on account?

If your income drops from one year to the next then you'll look to reduce POA. Maybe you lost a big client, took a career sabbatical, or had a normal year after a bumper one. Where this is the case then you can ask HMRC to reduce POA. 

But here's the key:

• Only reduce if you're confident that your tax bill will really be lower
• This can't be a guesstimation, doing too much has consequences

Reducing excessively means you can end up owing more later! HMRC can hit you with potential penalties and interest charges for any shortfall. 

It can become problematic if you earn a certain amount of income one year and this then drops significantly the next. But then it's not unusual for income to fluctuate in business so you may well be confident that your tax bill will be lower than the prior year.

Example, the risk of guesswork!

Pam, a freelance interior designer had a record-breaking 2024 with clients. Her mistake was to assume this was a one-off and that it couldn't possibly continue. So, she applied to reduce her 2025/26 POA. 

But it turns out that while her income dipped, it wasn't by anywhere near as much as she expected. 

The result was she ended up underpaying by £6,000. This meant by January she owed the balance and interest on top. Whilst not a huge amount it did have an impact on her finances. 

The lesson is it's fine to reduce but only do so on solid income and earnings evidence!

How to do it

Online: Log into your HMRC account, go to your latest return, and choose 'Reduce payments on account.'

By post: Fill out form SA303 and send it to HMRC.

Either way, you’ll need to explain why your next bill will likely be lower. Don’t low ball just to improve short term cash flow!

6. The need to put money aside for tax payments

POA need not hurt, so long as you set sufficient money aside for it. Generally in our experience the ones who suffer the most aren't necessarily those with the big bills, but those who didn't see their bill coming. 

As a suggestion, if you're self-employed or running a business, adapt a mentality whereby you treat your tax money like it's not yours. If you think about it, it isn't.

Example, sound budgeting in action!

Rachel runs an expanding laundry business and she set up a second bank account to put some of her earnings aside for personal tax. 

Every time she got paid out of the business, she moved 30% straight into that account, there were never any exceptions. 

This meant when January came and she had to make her first POA and balancing payment, there was no stress, she had the cash ready. In fact she was able to give herself a bonus as she'd saved some extra. 

Saving into a separate account can provide real peace of mind.

Suggested steps

• Log into your HMRC account to check what's owing for January and July
• Set up your separate 'tax only' savings account
• Move a fixed percentage of your income into that account (consider 25% - 30% depending on your earnings)
• Put reminders in your calendar for relevant key tax changes, dates, and deadlines
• Work with an advisor to help you forecast your tax liability early and adjust savings as earnings change

Top tip:

Be sure to save based on what you'll owe. Your tax bill reflects your profit extraction, not your top-line income. So budget smart by checking what you're actually taking home. 

7. How to pay your self assessment tax bill?

You've done the maths, you've set money aside, and now it's time to make payment. 

Below we detail how you can pay HMRC.

Payment methods:

• Online or mobile banking (tends to be fastest)
• Telephone banking
• CHAPS (same-day) or BACS (around 3 days)
• Debit card (online)
• In person at your bank or building society

Importantly, and per the above, not all payment methods process at the same speed! 

If the deadline falls on a bank holiday weekend then you need to make sure that your payments clear by the last working day before. 

Our advice is pay early where possible and know your method and related timings. 

8. Why filing your tax return early can be a smart move

Being tax efficient is a process that starts with your tax return. Be sure to read our post about how to be better prepared for your online tax return. Waiting until January is akin to procrastination and sacrificing your peace of mind. So, look to file early for planning purposes and to help control your finances. 

Here's how you benefit when you file early:

a) You get your bill sooner

So you can plan for making payment, as opposed to scrambling for funds at the last minute.

b) Your get potential refunds sooner

If you've overpaid then the more promptly you file, the earlier the refund is likely to be paid into your bank account.

c) Pay through your tax code (where relevant)

If your bill comes in under £3,000 and you file before 30 December then you may be able to spread the cost through PAYE meaning no big cash hit in January.

d) Avoid the January madness

We find many people leave things to the last minute when it comes to tax returns. The result is HMRC's phone lines are jammed, and accountants are swamped. This means mistakes can happen while any late submissions result in fines.

Example, breaking bad habits

Jennifer, a freelance PR consultant, had a terrible tendency to submit her return on 30th January, always very close to the deadline and only finding out what she owed last minute. It had the effect of ruining her start to the year and could cause anxiety as to what the payment could be.

Then one year she took advice and filed in June. It made her feel like a financial adult as she now knew what she owed, and she had over half a year to prepare for paying it. This also brought to an end her post-Christmas emotional slump over the state of her finances.  

9. A final reminder

This post was created on 29/07/2016 and updated on 28/01/2026.