The part of Self Assessment that catches first-time filers off guard — HMRC asks you to prepay next year's tax, half now and half in July.
The first January after going self-employed is when Self Assessment springs its biggest surprise. You expect to pay last year's tax — instead HMRC hands you a bill that is, in effect, one and a half times the size, because it also wants the first instalment of next year's tax in advance. Understanding payments on account before that January is the difference between a planned outgoing and a cash-flow shock.
For employees, PAYE collects tax steadily as they earn. The self-employed pay through Self Assessment once a year, which would otherwise let them hold on to a full year's tax before settling up. Payments on account close that gap by collecting next year's tax in two instalments, keeping the self-employed roughly in step with employees.
You are brought into the regime when two conditions are met: your Self Assessment liability is more than £1,000, and less than 80% of your tax was deducted at source. Most full-time sole traders qualify.
Imran becomes a self-employed consultant and his 2024/25 Self Assessment liability (Income Tax plus Class 4 NI) works out at £6,000. His tax was not collected at source and exceeds £1,000, so payments on account apply.
On 31 January 2026, Imran must pay:
| Item | Amount |
|---|---|
| Balancing payment for 2024/25 | £6,000 |
| First payment on account for 2025/26 (50%) | £3,000 |
| Total due 31 January 2026 | £9,000 |
Then on 31 July 2026 he pays the second payment on account for 2025/26: another £3,000.
By July he has prepaid £6,000 towards 2025/26. If his 2025/26 liability turns out to be exactly £6,000, the two payments on account cover it and there is no further balancing payment — only the next year's first instalment. The quarterly planner helps spread the burden: try the quarterly planner to set money aside.
Payments on account cover your Income Tax and Class 4 National Insurance. They do not include Class 2 NI (which is collected separately and was made voluntary for most from April 2024), Capital Gains Tax, or the High Income Child Benefit Charge — those are settled in full as part of the balancing payment. This is why your January bill is sometimes a little higher than two neat halves would suggest.
Payments on account are not an extra tax — they are the same tax, simply collected earlier. The pain is purely about timing and cash flow, not the amount you ultimately owe.
If your income is dropping — you have wound down a contract, taken a salaried job, or had a quiet year — you can apply to reduce your payments on account so you are not lending HMRC money you will only reclaim later. You do this through your online account or on the return itself. The risk is symmetrical: reduce too aggressively, owe more than you paid, and HMRC charges interest on the shortfall from the original due dates. Base any reduction on a sober estimate, not optimism. Use the sole trader calculator to project your liability before deciding.
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