HMRC Payments on Account Explained (2026/27 Rules & Calculation)

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What Are Payments on Account?

Under Section 59A of the Taxes Management Act 1970 (TMA 1970), Payments on Account are advance payments towards your next year's tax liability.

Instead of waiting for the year to end and paying your entire tax bill in one lump sum, HMRC splits your estimated upcoming tax into two equal installments:

First Payment on Account: Due on 31 January (midnight)
Second Payment on Account: Due on 31 July (midnight)

Each installment is exactly 50% of your previous tax year's total Income Tax and Class 4 National Insurance liability.

The Short Answer

Payments on Account are advance installments for next year's tax.

HMRC assumes you will earn roughly the same profit this year as you did last year. Each installment covers half of that anticipated bill.

The First-Year "150% Bill Shock"

For newly registered sole traders, freelancers, and side hustlers, the first 31 January deadline comes as a massive psychological shock.

Because you have not made any advance payments for your first year of trading, HMRC requires you to pay both:

100% of your tax bill for the tax year just completed (the "Balancing Payment").
50% of that same amount as your first advance payment towards the current tax year.

Real Example: Liam (First-Year Freelance Web Designer)

Liam completed his first full tax year as a sole trader. His calculated Income Tax and Class 4 NIC comes to £4,000. He budgeted £4,000 into his savings account.

2025/26 Balancing Tax Liability£4,000

First Payment on Account (50% of £4,000)£2,000

Total Due by Midnight 31 January 2027£6,000

Second Payment on Account Due by 31 July 2027-£2,000

Takeaway: On 31 January, HMRC requires £6,000 (£4,000 balancing payment + £2,000 first payment on account). Then on 31 July, Liam must pay the remaining £2,000.

Exemption Rules (The £1,000 & 80% Thresholds)

You do NOT have to make Payments on Account if you satisfy either of these statutory conditions:

You Are Exempt from Payments on Account If:

Your total tax bill was under £1,000: If your net Income Tax and Class 4 NIC liability is £999.99 or less, you do not enter the Payments on Account regime. You simply pay your balancing bill once on 31 January.
80% or more of your tax was already deducted at source: If you have a primary PAYE employment job or work under the Construction Industry Scheme (CIS) where taxes are deducted before you receive your money, and those deductions cover at least 80% of your total tax bill.

Note on other liabilities: Payments on Account do not apply to Student Loan repayments, Capital Gains Tax, or Class 2 National Insurance (voluntary). These liabilities are paid strictly as part of your final balancing payment on 31 January.

The 31 January & 31 July Schedule

Here is how the continuous cycle works across two tax years:

Date	Milestone	What is Being Paid
31 January 2027	Balancing Payment (Year 1)	The remaining tax owed for 2025/26
31 January 2027	1st Payment on Account (Year 2)	50% advance towards 2026/27
31 July 2027	2nd Payment on Account (Year 2)	50% advance towards 2026/27
31 January 2028	Balancing Payment (Year 2)	Any difference between the advance payments and your actual 2026/27 bill (or a refund if you overpaid!)

Once you pass through Year 1, the rhythm becomes predictable. In Year 2, because you already paid two 50% installments, your January bill only covers any surplus plus the advance for the next year.

How to Reduce Payments (Form SA303)

What happens if your business income dropped significantly? Perhaps you lost a core client, went on parental leave, ceased trading, or started a full-time salaried job.

You do not have to pay payments based on previous profits that you are not going to repeat. You can formally claim to reduce your Payments on Account:

Online via Government Gateway: Sign in to your HMRC online tax account, navigate to your Self Assessment section, and select "Reduce Payments on Account".
Postal Form SA303: Download and complete form SA303 (Claim to reduce payments on account) and post it to HMRC.

Common Mistakes to Avoid

Worked Example: Step-by-Step Numbers

Let's look at an ongoing business over two consecutive years to see how refunds and adjustments balance out:

Real Example: Sarah (Consultant)

Sarah pays £6,000 total tax in Year 1 (£3,000 on 31 Jan + £3,000 on 31 July as Payments on Account). In Year 2, she takes 3 months off and her actual tax bill is only £5,000.

Year 2 Actual Tax Liability£5,000

Advance Payments Made (Jan & July)--£6,000

Net Balancing Position-£1,000 (Refund Due)

Takeaway: Because Sarah had already paid £6,000 across January and July, HMRC credits the £1,000 overpayment directly against her next year's bill, or refunds it to her bank account.

Take Control of Your Tax Cashflow

Set aside 25% - 30% of every client invoice into a dedicated high-yield business savings account.
If your tax bill will be over £1,000, prepare for the 150% first-year bill on 31 January.
If your income has fallen, submit form SA303 before 31 January or 31 July to avoid tying up cash unnecessarily.
If you are struggling to pay, check HMRC's Time to Pay arrangement service.

Explore Deadlines & Penalties

Frequently Asked Questions

If your tax bill is £1,000 or more, HMRC automatically requires you to pay your previous year's tax PLUS 50% in advance towards next year's bill on 31 January. This makes your first bill effectively 150% of your actual tax liability.

Yes. You can request a reduction online via your Government Gateway account or by submitting form SA303. You should do this if you lost clients, stopped trading, or took a PAYE job.

If you reduce your payments and your actual profit turns out to be higher, HMRC will charge statutory interest on the underpaid amount dating back to when the payments were originally due. If done carelessly or deliberately, penalties can also apply.

No. Payments on Account only include Income Tax and Class 4 National Insurance. Student Loan repayments, Capital Gains Tax, and High Income Child Benefit Charges are excluded and paid only in your balancing payment.

If you owe less than £30,000 and are within 60 days of the payment deadline, you can set up an online 'Time to Pay' installment plan directly through your HMRC Government Gateway account without speaking to an advisor on the phone.

UK Tax Information & Editorial Policy

TaxWiz content is produced for general educational information for UK sole traders, side hustlers, and creators under the 2026/27 tax year legislation (Finance Acts & HMRC internal manuals). We do not provide regulated legal or financial advice. Tax outcomes depend on individual circumstances. For bespoke advice, consult a qualified UK chartered accountant (ICAEW/CTA/AAT). Read our full Disclaimer and Editorial Standards.