How to Reduce Your Payments on Account If Your Income Has Fallen

You can reduce your payments on account when you expect your income to fall, by submitting a claim to HMRC to lower each instalment to a figure that matches your anticipated tax bill for the year. Payments on account are advance instalments towards your self-assessment tax bill, and HMRC bases them on your previous year's liability, so a drop in earnings can leave you paying more upfront than you will actually owe. For self-employed people, understanding how the payments on account self-employed HMRC system works is the difference between a healthy cash-flow position and needlessly handing money to HMRC months early.

Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice, helps sole traders manage exactly this. This guide explains how payments on account are calculated, when the January and July payments fall due, how to reduce them safely, and what happens with the balancing payment.

Key Takeaways

• Payments on account are two advance instalments towards your self-assessment bill, each equal to 50% of your previous year's tax liability.
• Payments on account are due on 31 January and 31 July each year, with a balancing payment on the following 31 January.
• You must make payments on account if your self-assessment bill was more than £1,000 and less than 80% of your tax was collected at source.
• You can reduce your payments on account online through your HMRC account or by submitting form SA303 when you expect lower income.
• Reducing payments on account too far triggers HMRC interest on the shortfall, currently charged from the original due date.
• Class 4 and Class 2 National Insurance and Making Tax Digital obligations still apply to your final figures for the 2026/27 tax year.

What are payments on account and how are they calculated?

Payments on account are advance payments towards your next self-assessment tax bill, each set at 50% of your previous year's income tax and Class 4 National Insurance liability. HMRC introduces them once your annual bill exceeds £1,000, spreading the following year's expected tax across two instalments rather than a single lump sum.

The calculation ignores any tax already deducted at source, such as PAYE, and it excludes Capital Gains Tax and student loan repayments from the payment-on-account figure. If your 2025/26 tax bill was £4,000, HMRC assumes 2026/27 will be similar and asks for two self-assessment advance payments of £2,000 each.

Worked example: Priya, a self-employed graphic designer, owed £5,000 in income tax and Class 4 National Insurance for 2025/26. HMRC sets two payments on account of £2,500 each towards 2026/27. She pays the first on 31 January 2027 and the second on 31 July 2027, having already settled the 2025/26 balance.

When are the January and July tax payments due?

Payments on account are due on 31 January and 31 July each tax year, and missing either date triggers HMRC interest from the day the payment was due. The 31 January instalment falls alongside the balancing payment for the previous year, so that date often carries two amounts at once.

Using Priya's figures, her 31 January 2027 demand covers the 2025/26 balancing payment plus the first 2026/27 payment on account. Her second January and July tax payment lands on 31 July 2027. Planning for both dates prevents the common shock of a doubled January bill.

For a full overview of how these dates and instalments fit together, see our guide to self-assessment tax returns.

How do you reduce your payments on account if income has fallen?

You reduce your payments on account by telling HMRC you expect a lower tax bill, either through the "Reduce payments on account" option in your online self-assessment account or by submitting form SA303. HMRC then recalculates both instalments to your revised estimate.

Reduce the figure to a realistic estimate of your actual liability, not an optimistic guess. If Priya's design work slows and she expects her 2026/27 tax to be only £3,000 rather than £5,000, she can reduce each payment on account from £2,500 to £1,500. The claim can be made before either instalment, and reducing the January figure automatically adjusts July.

Keep evidence of why income fell, such as lost contracts or reduced invoices, in case HMRC queries the reduction later.

What happens with the balancing payment and interest?

The balancing payment is the difference between your two payments on account and your actual tax bill, settled on the 31 January after the tax year ends. If your payments on account fell short, you pay the balance; if they were too high, HMRC refunds or credits the excess.

Reducing payments on account carries a risk: if you cut them below your eventual liability, HMRC charges interest on the underpaid amount from the original due dates, not from when the shortfall is discovered. In 2026/27, that interest accrues at HMRC's published late-payment rate. Where income later recovers, it is often safer to leave payments as set and reclaim any overpayment, rather than face an interest charge on an over-aggressive reduction.

How does Making Tax Digital affect payments on account?

Making Tax Digital for Income Tax does not change how payments on account are calculated, but it changes your record-keeping and reporting obligations. From 6 April 2026, sole traders with qualifying income above £50,000 must keep digital records, submit quarterly updates, and file a final declaration by 31 January.

Payments on account remain due on 31 January and 31 July regardless of MTD status. Those with qualifying income above £30,000 join MTD for Income Tax from April 2027, and those above £20,000 from April 2028. Accurate quarterly figures make it far easier to judge whether your income has genuinely fallen and whether a reduction claim is justified for the year.

Frequently Asked Questions

Can I reduce my payments on account if my income has dropped?

Yes. You can reduce your payments on account whenever you expect your tax bill to be lower than the previous year, either through your online HMRC self-assessment account or by submitting form SA303. HMRC recalculates both the January and July instalments to your revised estimate. Reduce the figure to a realistic amount, because underpaying triggers interest on the shortfall.

What happens if I reduce my payments on account too much?

If you reduce your payments on account below your actual tax liability, HMRC charges interest on the underpaid amount from the original due dates of 31 January and 31 July. You will also owe a larger balancing payment the following January. Base any reduction on a genuine, evidenced estimate of your income to avoid an unexpected interest charge.

Do payments on account include Class 2 National Insurance?

No. Payments on account cover income tax and Class 4 National Insurance only. Class 2 National Insurance, Capital Gains Tax, and student loan repayments are excluded from the payment-on-account calculation and are instead settled through the balancing payment due on 31 January after the tax year ends.

When are payments on account due for the 2026/27 tax year?

Payments on account for 2026/27 are due on 31 January 2027 and 31 July 2027, with the balancing payment due on 31 January 2028. The 31 January instalment usually falls alongside the previous year's balancing payment, so budget for both amounts on that single date.

Who has to make payments on account?

You must make payments on account if your last self-assessment bill was more than £1,000 and less than 80% of your tax was collected at source, such as through PAYE. Most self-employed people meet both conditions. If either does not apply, HMRC will not ask for advance payments.

How Blue Tick Can Help

Blue Tick Accountants advises self-employed clients across the UK on when a payment-on-account reduction is worthwhile and how far it can safely go without triggering HMRC interest. The team calculates your realistic liability, files the reduction correctly, and keeps your Making Tax Digital records in order for the 2026/27 tax year. Head to our website and book a meeting now.

Conclusion

Payments on account exist to spread your tax across the year, but they assume your income stays level. When earnings fall, a well-judged reduction keeps cash in your business without inviting an interest charge, provided your estimate is realistic and evidenced. The safest approach is to base any reduction on a proper forecast of your actual liability, then settle any difference through the balancing payment in January.

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