Payments on account in Self Assessment explained

This article was written with the help of AI.

Each payment on account is half of the tax a Self Assessment taxpayer owed for the previous year, and the two instalments fall due by midnight on 31 January and 31 July ^[1]. They are only waived when last year's bill was under £1,000 or when more than 80% of the tax was already collected outside Self Assessment, for example through PAYE ^[1].

The mechanism surprises first-time filers more than almost any other part of the tax system. A sole trader who files a first return in January can face the full bill for the year just ended plus a first advance instalment towards the current year, all on the same day ^[1]. Company directors with dividend income, landlords and employees with side income meet the same rule as soon as their untaxed income grows.

This guide sets out the legal basis of payments on account, how HMRC calculates them, who is exempt, how the balancing payment works, how to reduce the instalments with form SA303, what interest and penalties apply, and how payroll and PAYE coding interact with the whole system. Worked examples use the 2026-27 tax year rates.

Key takeaways

• Payments on account are two advance instalments, each normally 50% of the previous year's Self Assessment liability, due by 31 January and 31 July ^[2].
• No payments on account are required when the previous year's liability, after tax deducted at source, was under £1,000, or when more than 80% of the tax was deducted at source ^[2].
• Class 4 National Insurance is included, but Capital Gains Tax and student loan repayments are not ^[2].
• A taxpayer can reduce the instalments online or with form SA303, but interest is charged on any shortfall if the reduction proves too large ^[4].
• Late payment penalties apply to balancing payments, not to payments on account, which attract interest only ^[7].

What payments on account are and where the rule comes from

Payments on account are advance payments towards the next Self Assessment bill. GOV.UK describes them as a way to spread the cost of tax across two instalments, and confirms that they include Class 4 National Insurance for the self-employed ^[1]. They exist because income taxed through Self Assessment has no employer deducting tax each payday, so the system collects part of it before the tax year has ended.

The legal basis in the Taxes Management Act 1970

The rule sits in section 59A of the Taxes Management Act 1970, which sets out when a taxpayer must make payments on account of income tax ^[3]. HMRC's Self Assessment Legal Framework manual explains that payments on account are normally required where the taxpayer was assessed to income tax in the preceding year ^[2]. The same manual confirms that each payment cannot exceed 50% of the "relevant amount", which is the income tax assessed for the previous year minus the income tax deducted at source ^[2].

The relevant amount matters because it is not the same as total tax. PAYE deducted by an employer, tax credited on certain savings, and other tax deducted at source are taken out before the instalments are calculated ^[2]. An employee with a large salary and a small side business can therefore have a substantial total tax bill but a modest relevant amount.

What is included and what is not

HMRC's manual lists what goes into the instalments and what is left for the balancing payment ^[2]. The consumer guidance confirms that capital gains and student loans (for the self-employed) are paid with the January balancing payment instead ^[1].

The exclusion of Capital Gains Tax is significant for anyone who sold shares or a second property. For the 2026-27 tax year, gains are taxed at 18% within the basic rate band and 24% above it ^[16], and the whole amount falls into one January payment with no advance instalments. Student loan repayments follow the same pattern: a self-employed borrower repays 9% of income over the plan threshold, or 6% on a Postgraduate Loan, through the balancing payment ^[15].

Who has to make payments on account

Payments on account apply to anyone in Self Assessment whose previous year's liability meets the conditions in section 59A. That includes sole traders, partners, landlords, company directors with untaxed dividends, and employees who declare other income ^[17]. A person who needs to file for the first time must register by 5 October after the end of the tax year, or risk a penalty ^[17].

The £1,000 de minimis test

The first exemption is a fixed amount. GOV.UK states that payments on account are not required where the tax owed last year was less than £1,000 ^[1]. HMRC's manual makes the point more precisely: the £1,000 test applies to the relevant amount, so tax already deducted at source is ignored when deciding whether the limit is crossed ^[2].

This explains why many employees with modest side income never see a payment on account. A Self Assessment balance of a few hundred pounds after PAYE stays under the limit, so the whole amount is simply paid on 31 January ^[5].

The 80% deducted at source test

The second exemption looks at proportions rather than amounts. Payments on account are not needed where more than 80% of the tax owed was paid outside Self Assessment, for example through a tax code or by deduction from savings interest ^[1]. In the manual's terms, no payments on account are due when the relevant amount is less than one fifth of the total income tax assessed ^[2].

The tests are applied to the previous year's figures, not the current year. A taxpayer whose income jumps in the current year can still be exempt from instalments, and will then face a larger single balancing payment the following January ^[1].

How HMRC calculates the instalments

Each payment is usually half of the tax owed for the previous year, so HMRC effectively assumes the current year will look like the last one ^[1]. If income rises, the shortfall is collected through a balancing payment; if it falls, the taxpayer can reduce the instalments or claim a refund ^[1].

The payment calendar

The two instalments and the balancing payment run on a fixed annual cycle, set out on GOV.UK's deadlines page ^[5]. For the 2026-27 tax year, which runs from 6 April 2026 to 5 April 2027 ^[13], the cycle looks like this.

So for the 2026-27 tax year, the first payment on account falls on 31 January 2027 and the second on 31 July 2027, with the balancing payment due on 31 January 2028.

The first-year bulge

The first year a taxpayer crosses the thresholds produces the largest single payment. GOV.UK's own example shows a £3,000 bill for one year with no prior instalments: the taxpayer pays the full £3,000 plus a first payment on account of £1,500, so £4,500 is due on one January date ^[1]. The second payment on account of £1,500 follows on 31 July ^[1].

In effect, the taxpayer pays 150% of one year's liability in January. Planning for that cash requirement is the single most useful step a new sole trader can take, and HMRC's Budget Payment Plan lets a taxpayer make weekly or monthly Direct Debit payments towards the next bill to smooth it ^[10].

Worked example: an employee with a side business

Consider an employee on a salary of £45,000 with tax code 1257L, paid through PAYE, who also runs a small trade from home. The PAYE figures below come from the Moonworkers calculator engine; the Self Assessment figures apply the 2026-27 income tax bands ^[13] and Class 4 rates ^[12].

On that salary, PAYE deducts £6,484.20 of income tax and £2,594.40 of employee National Insurance over the year, leaving take-home pay of £35,921.40. The small gap between the PAYE deduction and the income tax on the return reflects the way PAYE tables convert a tax code into tax-free pay each period, rather than applying the exact Personal Allowance once a year.

Scenario A: £6,000 of trading profit

With £6,000 of profit, total income is £51,000. The Self Assessment calculation gives total income tax of £7,832, of which £6,484.20 was deducted through PAYE, leaving £1,347.80 to pay through Self Assessment. No Class 4 is due because the profit is below the £12,570 lower profits limit ^[12].

The relevant amount is above £1,000, so the de minimis test does not help. However, PAYE covered about 83% of the income tax assessed, which is more than 80% ^[1]. No payments on account are required, and the whole £1,347.80 is due as a single payment on 31 January ^[5].

Scenario B: £15,000 of trading profit

With £15,000 of profit, total income is £60,000 and the side income pushes part of it into the 40% higher rate band ^[13]. Total income tax is £11,432, so £4,947.80 remains after PAYE. Class 4 National Insurance at 6% on profits above £12,570 adds £145.80 ^[12], giving a Self Assessment balance of £5,093.60.

PAYE now covers only about 57% of the income tax, so the 80% exemption fails ^[2]. In a first year, the taxpayer owes the £5,093.60 balance plus a first payment on account of £2,546.80, a total of £7,640.40 on 31 January. A second payment on account of £2,546.80 follows on 31 July ^[1].

The table shows how a modest rise in side income moves an employee from a single annual payment to the full payments on account cycle. The rules behind each line are set out by HMRC's manual ^[2] and the Class 4 rates page ^[12].

Reducing payments on account with SA303

When income is expected to fall, the instalments based on last year can be too high. GOV.UK allows a claim to reduce them where business profits or other income go down, tax relief goes up, or tax deducted at source rises compared with the previous year ^[4].

How to make the claim

The claim can be made through HMRC's online service or on form SA303, which is completed on screen, printed and posted ^[4]. The taxpayer needs the name and address of their HMRC office and either their Unique Taxpayer Reference or an employer reference, and the online form cannot be saved part way through ^[4]. HMRC's manual adds that HMRC cannot reject a properly made claim ^[2].

The deadline is 31 January after the end of the tax year concerned ^[4]. In practice, a claim made before 31 January of the tax year reduces both instalments before either is paid, while a later claim can lead to a repayment of instalments already made.

Returning to Scenario B, suppose the trade slows and the following year's profit is expected to be £5,000. On that basis, income tax would be £7,486, leaving £1,001.80 after PAYE. A claim could reduce each instalment from £2,546.80 to £500.90, keeping £4,091.80 in the taxpayer's hands until the actual figures are known. If HMRC repays instalments after a successful claim, repayment interest runs from the date the payment was made ^[18].

The cost of reducing too far

A reduction is a forecast, and forecasts can be wrong. If the final bill turns out higher than the reduced instalments, GOV.UK states that interest is charged on the difference ^[1].

A deliberately low claim carries a further risk. Under section 59A(6), a person who fraudulently or negligently makes an incorrect statement in a claim can face a penalty of up to the difference between the payments that should have been made and those actually made ^[2]. An honest estimate that turns out wrong attracts interest but not this penalty ^[2].

Interest and penalties when payments are late

Payments on account and balancing payments are treated differently once they are late. Both attract late payment interest from the due date ^[2], but only the balancing payment attracts late payment penalties ^[7].

Late payment interest

HMRC late payment interest is set in legislation and linked to the Bank of England base rate. From 6 April 2025, the late payment rate is base rate plus 4%, up from base rate plus 2.5% previously ^[8]. Repayment interest on overpaid tax is set at base rate minus 1%, with a lower limit of 0.5% ^[8].

Because the rate moves with base rate, HMRC publishes a table of current and historic rates, and any calculation should use the rate in force for each day the payment is outstanding ^[8]. The gap between the two rates means that holding cash rather than paying HMRC on time is rarely worthwhile ^[18].

Late payment and late filing penalties

HMRC's Self Assessment Manual states that late payment penalties apply to balancing payments, determinations and amendments, but not to payments on account ^[7]. Any part of a payment on account still unpaid at the balancing payment date is, however, swept into the balancing payment and becomes exposed to penalties from then on ^[7].

Penalties for late filing are separate from the payment regime and apply even when no tax is owed ^[6]. A taxpayer who cannot pay in full can ask HMRC for a payment plan, which HMRC will agree only if it judges the plan affordable ^[11].

How PAYE and payroll interact with payments on account

Payroll is the main reason many people avoid payments on account altogether. Every pound of tax collected through a tax code reduces the relevant amount and raises the share deducted at source ^[2]. A tax code tells the employer or pension provider how much income tax to take from pay ^[25], and an HMRC-recognised payroll API that applies the code accurately each period keeps the PAYE side of the calculation exact.

Paying a Self Assessment balance through the tax code

A taxpayer who already pays tax through PAYE can have a Self Assessment balance collected through their tax code if they owe less than £3,000 and file the online return by 30 December (or a paper return by 31 October) ^[9]. HMRC sets this up automatically when all the conditions are met, unless the taxpayer asks it not to on the return ^[9].

The amount is then collected in equal instalments over 12 months through the employer's payroll ^[9]. In Scenario A, the £1,347.80 balance would be spread across the next tax year at about £112.32 a month. Coding out is not available if it would mean paying more than 50% of PAYE income in tax, more than twice the usual tax, or if a part payment was made to get under £3,000 ^[9].

For an employer, coding out shows up only as a changed tax code issued by HMRC, often a lower allowance or a K code. The employer's SME payroll platform applies it like any other code notice, and an employee with a tax code for a second job may see the adjustment on whichever employment carries the main code.

Directors, dividends and the 80% test

Owner-directors are a common group caught by payments on account. Dividend income is taxed through Self Assessment at 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band for the 2026-27 tax year, after a £500 dividend allowance ^[21]. None of that is deducted at source, so a director drawing a small salary and larger dividends usually fails the 80% test ^[1].

The salary element runs through payroll like any employee's, with employer National Insurance at 15% above the £5,000 secondary threshold ^[24]. The split between salary and dividends therefore shapes not only the total tax but also the size of the January and July instalments. Bureaux handling this for many directors often rely on a multi-client payroll dashboard to keep each director's PAYE figures ready for the year-end return.

Sole traders and new employers

A sole trader who takes on staff becomes an employer for PAYE while remaining in Self Assessment for their own profit. Their own Class 4 contributions, at 6% between £12,570 and £50,270 and 2% above ^[12], fall into their payments on account. Employer obligations for staff run separately through PAYE and are covered in detail in the guide to sole-trader payroll.

Small amounts of trading income may stay outside Self Assessment entirely. The trading allowance gives up to £1,000 of tax-free trading income each tax year, and gross trading income at or below that level may not need to be reported ^[22]. Where a return is required, HMRC's online tool confirms whether one is needed ^[27].

Making Tax Digital for Income Tax and payments on account

Making Tax Digital for Income Tax changes how sole traders and landlords keep records and report, starting with those whose qualifying income exceeded £50,000, who were required to use it from 6 April 2026 ^[14]. Those with qualifying income over £30,000 in the 2025 to 2026 tax year follow from 6 April 2027, and those over £20,000 in the 2026 to 2027 tax year from 6 April 2028 ^[14].

Quarterly updates under Making Tax Digital are a reporting obligation, not a change to the payment dates. Taxpayers in the service must pay any amount listed as due in either their Self Assessment account or their Making Tax Digital for Income Tax account, and some amounts can appear as "transferred to digital" ^[20]. HMRC's guide to using the service explains how quarterly updates feed the final tax return ^[26].

The practical benefit is visibility. Quarterly figures give a running estimate of the year's profit, which makes an informed SA303 reduction easier to justify ^[4]. The broader comparison between the two collection systems is covered in the Moonworkers guide to PAYE versus Self Assessment.

Practical checklist for the January deadline

The steps below draw on HMRC's guidance on paying, reducing and checking a Self Assessment bill ^[19].

1. Check last year's relevant amount against the £1,000 and 80% tests ^[2].
2. Expect PAYE underpayments or overpayments to be adjusted in the Self Assessment bill itself, since registered taxpayers do not receive a separate P800 calculation ^[23].
3. File online by 30 December if the balance is under £3,000 and coding out is preferred ^[9].
4. Decide whether an SA303 reduction is justified by a real fall in income ^[4].
5. Pay using the 11-character reference, the 10-digit UTR followed by K ^[10].
6. Set up a Budget Payment Plan for the following year if the cash flow is tight ^[10].

Check the tax code before the bill arrives

Because coding out and PAYE deductions shape both the 80% test and the size of the instalments, it is worth confirming that each tax code is right before the return is prepared. The Moonworkers tax code checker decodes any UK tax code and shows the tax-free pay it implies for the 2026-27 tax year.

Conclusion

Payments on account turn Self Assessment from a once-a-year bill into a rolling cycle of advance payments, built on the assumption that each year resembles the last. The two exemptions, the £1,000 relevant amount and the 80% deducted at source test, decide who is in the cycle, and both are driven by how much tax payroll has already collected.

That link between PAYE and Self Assessment is where accurate payroll data matters. As Making Tax Digital spreads to more sole traders and landlords, the information behind each instalment will arrive in quarters rather than once a year, and taxpayers who keep both their payroll and their trading records current will be best placed to set instalments that match reality.

Frequently asked questions

Why is a first Self Assessment bill with payments on account so much higher than expected?

In the first year that payments on account apply, the taxpayer pays the full balance for the year just ended plus the first payment on account for the current year, both on 31 January. That combined amount is 150% of one year's liability, followed by a further 50% on 31 July ^[2]. GOV.UK's own example shows a £3,000 bill becoming £4,500 due in January ^[1].

Can a taxpayer stop making payments on account when income has fallen?

A taxpayer cannot simply stop paying, but can reduce the instalments online or with form SA303 where profits or other income have fallen, reliefs have increased or more tax is deducted at source. The claim must be made by 31 January after the end of the tax year ^[4]. If the final bill proves higher than the reduced instalments, interest is charged on the shortfall ^[1].

Do payments on account include student loan repayments and Capital Gains Tax?

No. HMRC excludes both Capital Gains Tax and student loan repayments from the calculation of payments on account. They are paid in full with the balancing payment on 31 January after the tax year ^[2]. Class 4 National Insurance, by contrast, is included in the instalments ^[1].

What happens if the 31 July payment on account is missed?

Late payment interest runs from 31 July on the unpaid amount, at the HMRC late payment rate of base rate plus 4% ^[8]. Late payment penalties do not apply to payments on account themselves ^[7]. Any amount still unpaid at the following 31 January becomes part of the balancing payment, and from that point the 5% late payment penalties at 30 days, 6 months and 12 months can apply.