What Is Payment on Account—and Why It Catches Sole Traders Off Guard

If you’re self-employed or a sole trader filing a Self Assessment tax return, you might be surprised by a tax bill that’s bigger than expected. The culprit? HMRC’s Payment on Account system—a mechanism designed to spread your tax payments across the year, but one that often feels like a curveball in your first year of trading.

Let’s break it down in plain English.

🧾 What Is a Payment on Account?

Payment on Account is HMRC’s way of collecting advance payments toward your next tax bill. It applies if:

• Your tax bill is over £1,000, and

• Less than 80% of your tax was collected at source (e.g. via PAYE)

You’ll make two instalments:

• 31 January after the end of tax year: First payment (plus any balancing payment for the previous year)

• 31 July: Second payment

Each instalment is typically 50% of your previous year’s tax bill, including Class 4 National Insurance.

📊 Example: The First-Year Shock

Let’s say your tax bill for 2024-2025 tax year is £2,400. You’ll need to pay:

• £2,400 for the current year

• £1,200 as your first Payment on Account for next year

That’s £3,600 due by 31 January 2026—a hefty sum if you weren’t expecting it. Then, another £1,200 is due by 31 July 2026.

🔄 What Happens Next Year?

When you file your next return:

• If your actual tax bill is higher, you’ll owe a balancing payment

• If it’s lower, you may be due a refund

• Your new Payments on Account will be recalculated based on the latest figures

🛠️ Can You Reduce It?

Yes—if you expect your income to drop, you can apply to reduce your Payments on Account:

• Online via your HMRC account

• Or by submitting form SA303

⚠️ But be cautious: if you underpay, HMRC may charge interest and penalties.

✅ Tips to Stay Ahead

• Budget throughout the year—set aside 25–30% of your profits

• File early—know your tax bill well before the deadline

• Use accounting software to track income and expenses and estimated tax liabilities

• Speak to your accountant—we’re here to help you plan and avoid surprises

🧠 Final Thoughts

Payment on Account isn’t a penalty—it’s a prepayment. But without guidance, it can feel overwhelming. At Accounted 4 Tax Ltd, we help sole traders and self-employed professionals understand the system, plan ahead, and stay compliant with confidence.

Need help calculating your Payment on Account or reducing it? Let’s chat.

We offer free initial consultations to set you up on your road without any surprises:

• info@accounted4tax.co.uk

• +447563811938

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