If You’re Self-Employed, Here’s How Payments on Account Affect Your Tax Bill

For many self-employed people, the first real shock of doing a Self Assessment isn’t the paperwork—it’s the bill. Just when you’ve made peace with what you owe for last year, HMRC politely asks for half of next year’s tax upfront too.

Welcome to payments on account: the system designed to help you “stay ahead” of your tax bill, though it often feels more like being ambushed by it. Sole traders and freelancers get caught off guard because the first time you pay, you’re covering both last year’s tax and an advance on the current one. It’s perfectly logical in theory—and perfectly painful in practice.

How payments on account work in practice

Once you’ve filed your Self Assessment, HMRC assumes next year will look a lot like last year—and asks you to start paying for it in advance. These are your payments on account, and they help spread your income tax across the year instead of landing it all in one painful lump.

Here’s how it works:

• HMRC takes your last year’s tax bill (excluding any capital gains tax or student loan repayments).
• They divide it in half.
• You pay one instalment by 31 January and the second by 31 July.

Both payments are credited toward your next Self Assessment tax bill, so when you file the following year, you’ll only owe the difference—if your income went up—or get a refund if you overpaid.

Payments can be made by BACS, Direct Debit, or through your HMRC online account. Just make sure the money leaves your bank account in time for the deadline—HMRC counts the payment date as when it’s received, not when you click “send.”

📌 Pro Tip: Payments on account don’t apply if you pay tax through your tax code or run a limited company—this one’s strictly for the self-employed and those paying tax through Self Assessment.

Why HMRC collects tax in advance

If you’re self-employed, your Self Assessment tax bill is paid in larger chunks rather than deducted monthly like an employee’s PAYE. To smooth that out—and keep the government’s cash flow ticking—HMRC asks you to make advance payments toward next year’s tax.

It’s not a penalty; it’s a prepayment system. Based on your previous year’s tax bill, HMRC assumes you’ll earn roughly the same this year and splits the estimated amount into two instalments:

• The first payment on account is due by 31 January, alongside your tax return.
• The second payment on account follows on 31 July, six months later.

Together, these self assessment payments cover your estimated liability for the current tax year. When the next year ends, you’ll reconcile what you’ve already paid with your actual tax owed—topping up if you earned more or getting a refund if you earned less.

📌 Pro Tip: Think of payments on account as a rolling system, not a double bill. Once you’ve made your first two instalments, you’ll only ever pay the balance from the previous year—unless your income changes dramatically.

Filing your return and seeing what you owe

Once you’ve submitted your Self Assessment through the Government Gateway, HMRC does the maths for you—adding up your income tax, National Insurance contributions, and any adjustments from previous years.

Your online account at GOV.UK will then show:

• The total tax due for the year
• How that total splits between your two payments on account
• Any overpayment or repayment due back to you

You can make an HMRC payment directly from your online account by bank transfer, card, or Direct Debit. Just remember: HMRC counts the payment date as the day they receive the money—not the day you send it—so don’t cut it too close to the deadline.

📌 Pro Tip: Log in a few days before the 31 January and 31 July deadlines to double-check your balance. HMRC updates your online account automatically, but it never hurts to see exactly how your tax payments are applied.

Payment deadlines and accepted methods

Your Self Assessment tax return comes with two key deadlines for payments on account:

• 31st January: Covers your first instalment for the new tax year and any balancing payment from the previous one.
• 31st July: Covers your second instalment, completing your advance payments for the year.

HMRC accepts several payment options, including:

• Bank transfer or online banking (usually clears within three working days).
• Debit or credit card payments online.
• Direct Debit, which can take up to five working days the first time you use it.
• Payment through your HMRC online account, which links directly to your Government Gateway.

📌 Pro Tip: Always check the amount of tax shown in your online account a few days before each deadline. HMRC updates figures automatically, so you’ll see any adjustments or refunds before sending your payment.

What happens if profits fall

If your income drops in the next tax year, you don’t have to keep paying at last year’s level. You can ask HMRC to reduce your payments on account to better match your new profit forecast.

It’s a straightforward process—just log into your Self Assessment account and adjust the figures online. But be careful: if you reduce them too far and your eventual tax return shows you owed more, HMRC will add interest and possibly late payment charges on the difference.

📌 Pro Tip: Only lower your payments if you’re confident your profits really have fallen. It’s better to overpay slightly and get a refund than to face penalties (and an unwelcome surprise) later.

Managing the cash flow strain

For small business owners and the self-employed, payments on account can feel like a cash flow ambush. You’re not just paying last year’s tax liability—you’re also prepaying part of next year’s. The best way to avoid a crunch is to plan for it early.

Smart ways to stay ahead:

• Ringfence funds in a separate savings account as you earn, so the January and July payments don’t catch you off guard.
• Keep tight bookkeeping throughout the year—knowing your numbers means fewer surprises when your Self Assessment return is due.
• Treat each instalment as a regular business cost, not an occasional shock, by building it into your monthly budget.
• If you genuinely can’t pay the full amount, contact HMRC early to set up a payment plan—they’re far more flexible before a deadline than after it.

📌 Pro Tip: Think of your tax fund as untouchable money—it’s not savings, it’s storage. Protecting it from day-to-day spending keeps your business solvent and your January calm.

Why planning ahead matters

For anyone new to self-employment, payments on account can be one of those “nobody told me that” moments. But once you understand how the system works, it’s entirely manageable.

By forecasting your likely next tax bill and setting aside money regularly, you keep control of your cash flow and avoid the January panic. A little forward planning—tracking your profits, estimating your liability, and ringfencing a percentage each month—turns a painful surprise into just another business expense.

📌 Pro Tip: Treat your future tax bill like a client invoice—non-negotiable and already due. It’s the simplest way to stay organised and sleep better at year-end.

Turn tax season into a non-event

Payments on account might sound daunting, but they’re really just HMRC’s way of keeping things running smoothly—both for you and for them. A bit of foresight now saves a lot of scrambling later, and the difference between a stressful tax season and a smooth one usually comes down to planning.

If you’re unsure how much to set aside or how to forecast next year’s tax liability, it’s worth getting advice early. A quick chat with a tax adviser through Unbiased can help you understand your numbers, plan your cash flow, and make sure every payment lands on time—without draining your sanity or your savings.

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