Home / Payments on account: what sole traders need to know
Payments on account are advance payments toward next year's tax bill, paid in two equal instalments — one in January and one in July. They exist because HMRC collects income tax in arrears. For sole traders with a rising income, they can turn a manageable annual tax bill into a significantly larger January demand than expected.
When you file your Self Assessment return for a tax year, if your total tax liability exceeds £1,000 and less than 80% was collected at source through PAYE, HMRC requires you to make two payments on account for the following year. Each payment is 50% of your current year's bill.
Example: your 2026/27 Self Assessment bill is £8,000. On 31 January 2028, you pay the remaining balance for 2026/27 (say £4,000 after a July on-account payment) plus the first payment on account for 2027/28 (£4,000, being 50% of £8,000). On 31 July 2028, you pay the second on-account payment of £4,000.
In the year a sole trader's income grows significantly, this means January can require paying off the prior year's remaining balance and a large on-account amount simultaneously — potentially around 150% of the annual tax bill in one month.
If your early self-employment income was modest or below the £1,000 threshold for on-account payments, you may have been paying no January or July instalments at all. The first year your bill exceeds the threshold — often when income grows as a business matures — you move from a simple annual payment to a three-part demand in one tax cycle.
This is not a penalty or a system error. It is a structural feature of how Self Assessment is designed. But it catches a significant number of people by surprise because the demand is larger than the underlying annual bill alone suggests.
The monthly set-aside figure shown in this calculator is calibrated to the annual bill, which covers the underlying tax. If you know payments on account will apply, setting aside slightly more than the calculator suggests — or simply accumulating twelve months of reserve before touching the account — reduces the January shock.
31 January: file your Self Assessment return for the previous tax year; pay the remaining balance for that year; and pay the first payment on account for the current tax year (each worth 50% of the prior year's bill).
31 July: second payment on account for the current tax year.
If your income for the current year will be lower than the previous year, you can apply to reduce your payments on account using HMRC's SA303 form. This avoids over-paying, but if your actual income turns out higher than estimated, HMRC will charge interest on the difference.
Late payments attract interest from the day after the due date. Persistent non-payment leads to surcharges and potentially enforcement action. If you cannot pay on time, contacting HMRC to discuss a Time to Pay arrangement before the deadline is always better than ignoring it.
The monthly set-aside figure shown here covers the estimated annual income tax and Class 4 NI bill. If you reserve this consistently into a separate account, you should have enough to cover the January payment — including the on-account element — without a cashflow crisis.
Use the quarterly reserve figure as a checkpoint. At the end of each quarter, compare the amount sitting in your tax reserve against the cumulative set-aside target. A gap means income has grown, expenses have been under-estimated or the reserve discipline has slipped.
For the year in which on-account payments first apply, consider reserving modestly more than the calculator suggests. Once the system is established and your income is relatively stable, the on-account cycle becomes predictable and manageable.
The homepage calculator is the fastest way to turn this guidance into a concrete monthly take-home and tax reserve estimate.
The first payment on account is due on 31 January and the second on 31 July each year. Each is 50% of your previous year's Self Assessment tax bill.
Payments on account apply when your total Self Assessment tax liability exceeds £1,000 and less than 80% of it was collected at source through PAYE. If your bill is £1,000 or less, no payments on account are required.
Yes, if you expect income to be lower in the current year than in the previous one. Use form SA303 to request a reduction. If your actual income is higher than you estimated, HMRC charges interest on any underpaid amount.
The calculator shows a monthly set-aside and quarterly reserve based on the estimated annual tax bill. It does not automatically add the on-account element, but building the annual reserve gives you the cash needed to cover both the balancing payment and the on-account instalments.
Interest applies from the day after the deadline. After 30 days, a surcharge of 5% applies to unpaid amounts. If you are unable to pay, contact HMRC as early as possible to arrange a Time to Pay agreement.