Payments on Account for Sole Traders: 2026/27 Guide

Payments on account can make a sole trader’s first large Self Assessment bill look much higher than expected.

HMRC may ask you to pay two amounts at the same time. First, you pay any tax still owed for the tax year you have just reported. You may also need to make an advance payment towards the following tax year.

If payments on account apply, you normally pay them in two instalments. The first falls on 31 January and the second on 31 July.

Each instalment usually equals 50% of the relevant amount from your previous year’s Self Assessment calculation.

For example, someone filing a 2025/26 tax return may need to pay their remaining 2025/26 liability plus their first payment towards 2026/27 on 31 January 2027.

The important point is simple: a payment on account is not an extra tax charge. It is an advance payment towards your next Self Assessment bill.

Quick Answer

Payments on account are advance payments towards your next Self Assessment bill. HMRC normally collects them in two instalments, due on 31 January and 31 July. Each instalment usually equals 50% of the relevant amount from your previous year’s Income Tax and Class 4 National Insurance calculation.

You will not normally need to make payments on account if the relevant amount from the previous year was below £1,000 or enough of your tax was already collected outside Self Assessment.

If you genuinely expect your next tax bill to fall, you can ask HMRC to reduce your payments.

What are payments on account?
Who has to make payments on account?
How are payments on account calculated?
Payments on account dates for 2026/27
Why can the first January payment be 150% of your tax bill?
What is a balancing payment?
Can you reduce payments on account?
What happens if your income increases?
What happens if you overpay?
What if you cannot afford your payment?
How to budget for payments on account
Does Making Tax Digital change payments on account?
Common payments-on-account mistakes

What Are Payments on Account for a Sole Trader?

Payments on account are advance instalments towards your next Self Assessment liability.

HMRC uses your previous year’s tax position as a starting point because it does not yet know your final liability for the current year when the first instalment becomes due.

For sole traders with reasonably stable profits, this means part of the following year’s Income Tax and Class 4 National Insurance may already have been paid before the final tax return is completed.

HMRC’s payments on account guidance explains how the two-instalment system works.

You should therefore think of payments on account as tax paid early, rather than an additional charge for being self-employed.

Who Has to Make Payments on Account?

Payments on account can apply when you complete Self Assessment and still have enough tax to pay through the system.

You normally do not need to make them if either:

the relevant amount from the previous year was less than £1,000, or
more than 80% of the relevant tax was already collected outside Self Assessment, for example through PAYE.

The £1,000 figure does not refer to your business turnover or profit. It relates to the relevant tax amount used in the payments-on-account calculation.

An amount of exactly £1,000 can therefore still bring you into the system if the other exemption does not apply.

Your HMRC online account or Self Assessment statement should show whether HMRC expects payments on account from you.

How Does HMRC Calculate Payments on Account?

For a straightforward sole trader, HMRC normally sets each payment at 50% of the relevant previous-year amount.

However, HMRC does not simply divide every figure on your Self Assessment bill in half.

What the Calculation Usually Includes

Payments on account normally take account of relevant:

Income Tax
Class 4 National Insurance

The calculation can also reflect tax already deducted at source.

What the Calculation Does Not Include

HMRC does not include certain liabilities when it calculates payments on account. These include:

Capital Gains Tax
Student Loan repayments
Postgraduate Loan repayments
Class 2 National Insurance

HMRC deals with these amounts separately through the final Self Assessment calculation where relevant.

Payments on Account Example for 2026/27

Imagine a sole trader completes their first 2025/26 Self Assessment return.

Their relevant liability for payments-on-account purposes comes to £4,000.

Date	Payment	Amount
31 January 2027	2025/26 tax still due	£4,000
31 January 2027	First payment on account for 2026/27	£2,000
31 July 2027	Second payment on account for 2026/27	£2,000

The sole trader would therefore need £6,000 on 31 January 2027.

That figure often causes confusion.

The additional £2,000 does not represent more tax for 2025/26. It counts towards the person’s 2026/27 Self Assessment liability.

Why Can the First January Bill Feel So High?

A sole trader who enters the payments-on-account system for the first time may need to pay:

100% of the previous year’s outstanding liability + 50% towards the next year.

Using the £4,000 example:

£4,000 + £2,000 = £6,000

That January payment equals 150% of the £4,000 liability the sole trader may originally have expected.

This often affects people after their first profitable year of self-employment or after their tax liability increases enough for payments on account to start.

What Changes in Later Years?

The system becomes easier to understand once you have already made payments towards the year you are reporting.

HMRC credits those earlier instalments against your final liability.

You then pay any remaining balance and, where applicable, start making payments towards the following tax year.

Completing your return early can help because it gives you more time to prepare for the January payment.

Real Key’s guide to how much tax a sole trader should save explains related budgeting considerations.

What Is a Balancing Payment?

Payments on account use the previous year’s figures as an estimate.

Your actual liability may turn out to be higher or lower.

For example, suppose you paid:

£2,000 on 31 January 2027
£2,000 on 31 July 2027

You have now paid £4,000 towards 2026/27.

If your final relevant liability for 2026/27 comes to £5,000, you still owe £1,000.

HMRC calls this remaining amount the balancing payment.

You would normally pay it by 31 January 2028.

A new first payment on account for 2027/28 may also fall due on that date.

This explains why January bills can change when your business profits rise or fall.

Can You Reduce Payments on Account?

Yes. You can ask HMRC to reduce your payments if you genuinely expect your relevant tax liability for the current year to fall.

Possible reasons include:

losing a major customer
reducing your working hours
stopping your business
earning lower profits
having higher allowable business expenses
having more tax deducted at source
becoming entitled to additional tax relief

You can usually claim to reduce payments on account through your HMRC online account or by using form SA303.

Do Not Reduce Them Just Because Cash Is Tight

A payment reduction should reflect a lower expected tax liability.

It is not simply a way to postpone a tax payment.

If you reduce your payments too far and your eventual liability turns out to be higher, HMRC can charge interest on the underpaid amount.

A sensible forecast matters.

If your bookkeeping is current, you can estimate your profit more accurately before deciding whether a reduction makes sense.

What Should You Do When Your Income Changes?

Situation	Practical next step	Why
Profits should stay similar	Budget for the payments HMRC shows	Last year’s liability may remain a reasonable guide
Profits may fall significantly	Prepare a forecast and consider a reduction	The original instalments may become too high
You have stopped trading	Review whether you can reduce the payments	Your expected current-year liability may have fallen
Profits are increasing	Put additional tax money aside	Existing payments may not cover the final bill
Cash is tight but your tax has not fallen	Check HMRC payment options	Cash-flow difficulty does not automatically justify a reduction

What Happens If Your Profit Increases?

Your payments on account normally remain based on the previous year’s relevant liability.

HMRC does not usually increase the instalments simply because your current profits are rising.

However, a higher profit can create a larger balancing payment later.

For example, your two payments on account might total £4,000, while your final liability comes to £6,000.

You would then need to find the extra £2,000 when the balancing payment falls due.

Growing Businesses Should Monitor Profit Regularly

Rapid business growth can make last year’s tax figure a poor guide to this year’s final liability.

Regular bookkeeping helps you track the difference.

You can then set aside extra money rather than assuming your existing payments on account will cover everything.

What Happens If You Pay Too Much?

Your actual tax liability may turn out to be lower than the amount you paid on account.

In that situation, your Self Assessment account can show an overpayment.

HMRC may use the excess against another amount due or allow you to request a refund, depending on your circumstances.

This is another reason to remember that payments on account are estimates.

The final tax return establishes the eventual liability.

What If You Cannot Afford a Payment on Account?

Do not automatically reduce your payment because of a cash-flow problem.

Ask yourself why the payment feels unaffordable.

If your expected tax liability has genuinely fallen, a reduction may make sense.

If the liability remains correct but you do not have enough cash available, you should look at HMRC’s payment options instead.

Budget Payment Plans

If your Self Assessment payments are up to date, HMRC may allow you to make regular weekly or monthly payments towards a future tax bill.

You can read about the HMRC Budget Payment Plan.

Time to Pay

If you cannot pay an amount by the deadline, HMRC may consider a Time to Pay arrangement.

The options available depend on your circumstances and the amount outstanding.

Contact HMRC promptly rather than ignoring the bill.

Interest can apply to late payments.

How Should Sole Traders Budget for Payments on Account?

Good planning can make January and July much easier to manage.

A practical process is:

Keep your bookkeeping up to date throughout the year.
Estimate taxable profit instead of relying on your bank balance.
Keep tax money separate from ordinary spending where practical.
Complete Self Assessment early enough to understand the January figure.
Check whether your January bill includes both a balancing payment and a new payment on account.
Add the 31 July instalment to your cash-flow forecast.
Review your estimate if profits change significantly.

Real Key’s bookkeeping guide for sole traders explains how regular financial records support better tax planning.

Does Making Tax Digital Change Payments on Account?

Making Tax Digital for Income Tax changes how affected sole traders keep records and report information.

It does not currently replace the normal Self Assessment payments-on-account timetable with quarterly tax payments.

Qualifying sole traders and landlords entered MTD for Income Tax in stages from 6 April 2026.

Affected taxpayers must keep digital records and send quarterly updates through compatible software.

However, quarterly reporting does not mean you pay Income Tax every quarter.

The normal Self Assessment payment rules continue to apply unless HMRC or the government formally changes them.

Because MTD rules continue to develop, always check the latest HMRC Making Tax Digital guidance before relying on an older article or tax-year example.

Common Payments-on-Account Mistakes

Sole traders often run into problems because they misunderstand what HMRC has calculated.

Mistaking the January Bill for an Error

A large January bill may include both the previous year’s balance and the first payment towards the next tax year.

Check the breakdown before assuming HMRC has charged you twice.

Confusing the £1,000 Rule With Turnover

The £1,000 payments-on-account test does not refer to business sales.

It relates to the relevant amount within your Self Assessment calculation.

Forgetting the July Instalment

January gets most of the attention, but the second payment normally falls on 31 July.

Include it in your cash-flow forecast.

Reducing Payments Without a Reliable Forecast

A lower payment can help when profits genuinely fall.

An unrealistic reduction can create interest charges later.

Assuming MTD Means Quarterly Tax Payments

MTD can require quarterly updates.

That does not currently mean sole traders must pay their Income Tax every quarter.

Leaving the Calculation Until January

Waiting until close to the deadline gives you less time to find the money.

Early bookkeeping and earlier filing provide more time to plan.

Need Help With Payments on Account?

If your Self Assessment statement includes a balancing payment and payments on account, Real Key Accountancy can help you understand what the figures mean.

Support can include bookkeeping, Self Assessment and practical tax administration for sole traders and small businesses.

Contact Real Key Accountancy to discuss your records and requirements.

Conclusion

Payments on account allow HMRC to collect part of your next Self Assessment liability in advance.

For sole traders who fall within the rules, HMRC normally splits the payments between 31 January and 31 July.

The biggest surprise often comes in the first January when you must pay both an outstanding tax liability and the first advance instalment for the following year.

Check your HMRC statement carefully, keep your bookkeeping current and plan for both payment dates.

Only ask HMRC to reduce your instalments when you have a genuine reason to expect a lower tax liability.

This article provides general information and does not constitute personalised accounting, tax, legal or financial advice. Tax treatment and reporting requirements depend on individual circumstances, and rules can change. Check current HMRC guidance or seek professional advice where necessary.

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Frequently Asked Questions

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What are payments on account for sole traders?

Payments on account are advance payments towards your next Self Assessment tax bill. They normally consist of two instalments, due on 31 January and 31 July. Each is generally 50% of the relevant amount from your previous year's tax calculation. They are credited against the next year's final liability rather than being an additional tax charge.

Do all sole traders have to make payments on account?

No. HMRC normally does not require payments on account where the relevant previous-year amount is below £1,000 or the applicable tax-at-source test is satisfied. Whether they apply depends on your Self Assessment calculation, not simply on the fact that you are registered as a sole trader.

Is the payments-on-account threshold £1,000 or more than £1,000?

HMRC's legal-framework guidance states that payments on account are not required where the relevant amount is less than £1,000. This means a relevant amount of exactly £1,000 can fall within the payments-on-account rules if the other exemption does not apply.

Why is my first January Self Assessment payment so high?

The first January in which payments on account apply can include both the tax still due for the year you have just reported and the first 50% advance instalment for the next tax year. A £4,000 first-year liability, for example, could produce £6,000 due in January before the second £2,000 instalment in July.

When are payments on account due?

The first payment on account is normally due by 31 January and the second by 31 July. For payments towards 2026/27, the normal dates are 31 January 2027 and 31 July 2027. Any balancing payment for 2026/27 would normally be due on 31 January 2028.

Do payments on account include National Insurance?

Payments on account include relevant Class 4 National Insurance for self-employed taxpayers. HMRC's calculation rules exclude Class 2 National Insurance from the payments-on-account calculation.

Do payments on account include Capital Gains Tax or Student Loans?

No. Capital Gains Tax and Self Assessment Student Loan or postgraduate loan repayments are excluded from the payments-on-account calculation. Where applicable, these amounts are dealt with through the balancing payment instead.

Can I reduce my payments on account if my profits fall?

Yes. If you genuinely expect the current year's relevant tax liability to be lower, HMRC allows you to make a claim to reduce your payments on account. You can normally do this online or through form SA303. Keep a sensible calculation supporting your revised estimate.

Can I reduce payments on account to zero?

Potentially, if you genuinely believe no relevant payment-on-account liability will arise — for example because you have stopped trading and your expected taxable position supports a nil amount. A reduction must be based on the expected tax liability rather than simply a desire to delay payment.

What happens if I reduce my payments too much?

If you reduce your payments on account and your eventual tax liability is higher than your revised estimate, HMRC can charge interest on the amount that should have been paid earlier. A reduction should therefore be based on a realistic forecast rather than an intentionally low estimate.

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