It is the part of the 31 January bill that catches new sole traders out: an advance on tax you have not even earned yet.
The first Self Assessment bill is where many new sole traders get a nasty surprise. They expect to pay last year's tax and instead find HMRC has added a payment on account, asking for half of next year's tax in advance. Understanding this in advance turns a shock into a plan.
HMRC operates payments on account so that, over time, the self-employed pay tax closer to when they earn it rather than up to 22 months in arrears. The mechanism is the payments on account system: each January you pay any balance for the year just ended, plus the first of two advance instalments toward the current year.
The two payments on account are each 50% of your previous year's tax liability (Income Tax plus Class 4 National Insurance, but excluding Class 2 NI, student loans and Capital Gains Tax). The first falls due on 31 January and the second on 31 July.
The word "first" is doing a lot of work here. It signals that this is the opening instalment of a pair, not a one-off charge, and it is the one that lands on the same date as your main bill, which is why it feels so heavy. The reason it exists at all is that, before payments on account, a sole trader could earn money in one tax year and not pay any tax on it until the 31 January almost two years later. HMRC introduced the system so that tax is collected closer to when income is earned, smoothing the government's cash flow and, in theory, yours.
Suppose Jaspreet is in her second year of self-employment. Her 2024/25 Self Assessment shows an Income Tax and Class 4 National Insurance liability of £4,000, and she made no payments on account in her first year.
On 31 January 2026 her bill is:
| Element | Amount |
|---|---|
| Balancing payment for 2024/25 | £4,000 |
| First payment on account toward 2025/26 (50%) | £2,000 |
| Total due on 31 January 2026 | £6,000 |
Then on 31 July 2026 she pays the second payment on account of £2,000. Between them, the two payments on account total £4,000, matching last year's bill, on the assumption her 2025/26 income is similar. You can estimate your own figures with the sole trader calculator.
If you know your income has dropped, you can apply to reduce your payments on account through your Self Assessment account. This is sensible when business has slowed, but be cautious: if you reduce them too far and end up owing more, HMRC charges interest on the shortfall from the original due dates, so a wrong guess costs money. Payments on account also stop applying if your bill falls below £1,000, or if PAYE or other deductions at source already cover more than 80% of your tax, which is common for people who are mainly employed with a small amount of self-employment on the side.
The practical lesson for anyone in their first profitable year is to set money aside as they earn. A useful rule of thumb is to reserve roughly 30% of profit for tax and National Insurance; doing so means the combined balancing payment and first payment on account in January is already funded rather than a scramble.
The first payment on account is not an extra tax. It is the same tax, paid earlier. The shock is the timing, not the total.
From April 2026, sole traders over the Making Tax Digital threshold will submit four quarterly updates and a final declaration each year. Crucially, MTD changes how you report, not when you pay: the payments on account system, including the first payment on account on 31 January and the second on 31 July, continues unchanged. There is no separate quarterly tax payment under MTD; the quarterly updates are informational, and the actual tax is still settled through the existing payment dates. Keeping accurate quarterly records simply makes it far easier to forecast the instalments and set the cash aside steadily through the year, rather than discovering the size of the January bill at the last minute when there is no time left to fund it.
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