How HMRC Calculates Your Payments on Account

HMRC calculates each payment on account as 50% of your previous year's income tax and Class 4 national insurance liability, collecting the total in two instalments due on 31 January and 31 July. Payments on account are advance instalments towards your next self-assessment bill, and HMRC uses your most recently filed tax return as the basis for the estimate. Understanding how payments on account for the self-employed are worked out by HMRC helps you predict your cash flow, avoid a nasty January surprise, and reduce the payments where your income has fallen.

Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice, helps sole traders forecast these instalments accurately and claim reductions where they apply. This article explains how HMRC calculates payments on account, when each falls due, how the balancing payment works, and how to lower the amount when appropriate.

Key Takeaways

• HMRC calculates each payment on account as 50% of your previous tax year's income tax and Class 4 national insurance liability.
• Payments on account are due on 31 January and 31 July, with any balancing payment settled on the following 31 January.
• Payments on account are not required if your previous self-assessment bill was under £1,000, or if 80% or more of your tax was collected at source through PAYE.
• The first year you become liable to a larger tax bill, you effectively pay 150% of it in one January, because the balancing payment and first payment on account fall together.
• You can apply to reduce your payments on account if you expect your income to fall, but underestimating leaves you liable for interest on the shortfall.

What are payments on account and who has to make them?

Payments on account are advance instalments towards your self-assessment tax bill, required from most self-employed people whose liability exceeds a set threshold. HMRC introduces them so that tax is paid closer to the point income is earned, rather than in a single lump sum long after the tax year ends. They apply to income tax and Class 4 national insurance, but not to Class 2 national insurance or the High Income Child Benefit Charge.

You must make payments on account unless one of two exceptions applies: your previous self-assessment liability was less than £1,000, or at least 80% of the tax you owed for that year was already collected at source, for example through PAYE on a salary. If neither exception applies, HMRC will automatically request payments on account with your next bill. For a full overview, see our guide to self-assessment tax returns.

How does HMRC calculate each payment on account?

HMRC calculates each payment on account as half of your previous tax year's income tax and Class 4 national insurance liability, so the two instalments together equal 100% of last year's bill. The calculation assumes your income will be broadly the same as the year before, and adjusts through the balancing payment once your actual figures are known.

Take a sole trader whose 2025/26 self-assessment liability, covering income tax and Class 4 national insurance, comes to £6,000. HMRC will set two payments on account of £3,000 each towards the 2026/27 year. The first £3,000 is due on 31 January 2027 and the second £3,000 on 31 July 2027. Together they cover an expected £6,000 liability for 2026/27. If the actual 2026/27 bill turns out higher or lower, the difference is corrected by the balancing payment.

The liability driving each payment includes Class 4 National Insurance as well as income tax, which our guide to how Class 4 National Insurance is charged sets out.

When are the January and July tax payments due?

The two payments on account are due on 31 January and 31 July, the fixed self-assessment advance payment dates each year. The 31 January instalment falls on the same day as the balancing payment for the previous tax year, which is why January is the heaviest month in the self-assessment calendar. The 31 July instalment is the second, standalone advance payment.

Using the example above, the trader's schedule looks like this. On 31 January 2027 they pay any balancing payment for 2025/26 plus the first 2026/27 payment on account of £3,000. On 31 July 2027 they pay the second 2026/27 payment on account of £3,000. Then on 31 January 2028 they settle the 2026/27 balancing payment and make the first 2027/28 payment on account. Missing either the January or July tax payments triggers interest, and prolonged non-payment can attract penalties, so diarising both dates is essential.

How does the balancing payment work and can you reduce payments?

The balancing payment is the difference between your actual tax liability for the year and the payments on account you have already made, and it falls due on 31 January after the tax year ends. If your income rose, you pay the shortfall; if it fell, HMRC either refunds the overpayment or offsets it against your next instalment. This is also why your first year of higher self-employment income can feel harsh: on that January you pay the full balancing payment plus a first payment on account worth half again, roughly 150% of the year's bill in one go.

You can apply to reduce your payments on account if you genuinely expect your income, and therefore your tax, to be lower than the previous year. This is done through your self-assessment return or your HMRC online account. Reduce with care: if you cut the payments below what you actually end up owing, HMRC charges interest on the shortfall from the original due dates. Making Tax Digital for Income Tax is now live, and from 6 April 2026 sole traders and landlords with qualifying income above £50,000 must keep digital records and submit quarterly updates with a final declaration by 31 January, but this does not change the 31 January and 31 July payment dates.

Frequently Asked Questions

How does HMRC work out my payments on account?

HMRC works out your payments on account as 50% each of your previous tax year's income tax and Class 4 national insurance liability, so the two instalments together equal last year's bill. If your 2025/26 liability was £6,000, HMRC sets two payments of £3,000 towards 2026/27, due on 31 January and 31 July. Any difference from your actual bill is settled by the balancing payment.

When do I have to pay my payments on account?

Payments on account are due on 31 January and 31 July each year. The January instalment falls on the same date as the balancing payment for the previous tax year, making it the largest single payment date in self-assessment. The July instalment is a separate advance payment. Interest is charged on any amount not paid by these dates.

Can I reduce my payments on account?

Yes, you can apply to reduce your payments on account if you expect your income to fall, either through your self-assessment return or your HMRC online account. However, if you reduce them below your actual liability, HMRC charges interest on the shortfall from the original due dates. Only reduce payments where you have a realistic basis for expecting lower income.

Do payments on account include national insurance?

Payments on account include income tax and Class 4 national insurance, but they do not include Class 2 national insurance, capital gains tax or the High Income Child Benefit Charge. Those amounts are added to your balancing payment on 31 January instead. This is why the January bill often exceeds a simple 50% of the previous year's total liability.

How Blue Tick Can Help

Blue Tick Accountants helps self-employed clients forecast their payments on account, decide whether a reduction is justified, and plan cash flow around the 31 January and 31 July deadlines. Getting the estimate right avoids both interest charges and unnecessary strain on your finances. Head to our website and book a meeting now.

Conclusion

Payments on account are simply HMRC collecting next year's tax in advance, split into two equal instalments based on your last bill and settled up through the balancing payment. The key is to plan for the heavier January date, set money aside across the year, and review whether a reduction is appropriate if your income has dropped. Knowing exactly how the figures are calculated turns a stressful deadline into a predictable one.

About the Author

This guide was written by Leon, founder of Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice that helps self-employed people, landlords and limited company owners across the UK. It was last reviewed for the 2026/27 tax year.

This article is intended for general informational purposes only and does not constitute tax, legal, or financial advice. Tax rules are subject to change and their application will depend on your individual circumstances. You should always seek advice from a qualified professional before taking action. Blue Tick Accountants accepts no liability for decisions made on the basis of this content.

Related reading: How to Reduce Your Payments on Account If Your Income Has Fallen.

Related reading: Payments on Account and Cash Flow: How to Plan for January's Tax Bill.