What lands on 31 January in a first Self Assessment year: the full balancing payment for the year just filed, plus a payment on account of 50% towards the next one. People budget for the tax they owe and are asked for half as much again.
Employees never meet this, because PAYE takes tax as they earn. Move to self-employment, start letting a property, take significant dividends, or simply earn enough to be pulled into Self Assessment, and you meet a system that wants tax in advance — and the transition year is the one that hurts.
The mechanism is not unfair once you see it. But it is genuinely counter-intuitive, and it puts an unexpected demand on cash flow at the worst possible point in the calendar.
How It Works
If your Self Assessment bill exceeds £1,000, HMRC asks for payments on account towards the following year's tax. There are two, each 50% of your previous year's bill:
- 31 January — the same day as the balancing payment for the year just filed, and the same day as the filing deadline.
- 31 July — the second instalment, on its own.
The assumption behind it is that this year's income will resemble last year's, so paying half up front twice a year keeps you roughly level. Once you are a few years in, that is exactly what happens and the system becomes invisible.
The Year It Bites
Take a freelancer whose first full year produces a tax bill of £6,000. Here is what the calendar actually asks for:
| Date | What is due | Amount |
|---|---|---|
| 31 January | Balancing payment for year one | £6,000 |
| 31 January | First payment on account for year two | £3,000 |
| 31 January total | £9,000 | |
| 31 July | Second payment on account for year two | £3,000 |
| Paid within six months | £12,000 |
Twelve thousand pounds handed over in six months against a £6,000 annual bill. Nothing has been overcharged — the extra £6,000 is credit against year two — but someone who set aside £6,000 is £3,000 short on 31 January and short again in July.
The fix is arithmetic, not cleverness: in your first year, set aside enough for one and a half years of tax. Roughly 150% of your expected bill by 31 January, with the remaining half by July. Do this once and the problem never recurs, because from year two the payments on account are simply how you pay. The people who get into trouble are almost always the ones who saved exactly the right amount for exactly the wrong definition of "the bill".
Reducing a Payment on Account
You can apply to reduce your payments on account if you genuinely expect a lower bill — a client lost, a property sold, a year taken off, a move from self-employment back into a salaried job.
The catch is that the claim is checked against reality when you file. Reduce them too far and HMRC charges interest on the shortfall, backdated to the original due dates. The estimate has to be honest rather than optimistic, and the asymmetry matters: over-reducing costs interest, while leaving them alone costs only the temporary use of your own money, which comes back as a credit.
What Is and Is Not Included
Payments on account cover income tax and, where relevant, Class 4 National Insurance. Capital Gains Tax is not included — a gain reported in your return is settled with the balancing payment rather than spread across instalments, and a UK property disposal has its own separate 60-day deadline entirely.
So a year with a large one-off gain produces an unusually big January payment, while leaving the payments on account for the following year based only on the recurring income. That is the correct outcome and it looks wrong on the statement, which is why it is worth understanding before you telephone anyone about it.
Practical Habits That Make This Painless
- Open a separate tax account and pay into it as income arrives. A fixed percentage transferred on the day each invoice is paid is far more reliable than a January reckoning.
- File early, pay on time. Filing in the spring tells you both the balancing payment and the July instalment months in advance. Filing early does not bring the payment date forward.
- Diary 31 July. It is the deadline people forget, precisely because nothing else happens on it.
- Watch the £100 penalty. Missing the 31 January filing deadline triggers it immediately, even where no tax is owed.
Our Self Assessment walkthrough covers the return itself, tax year dates and deadlines lists the full calendar, and the self-employed calculator will estimate the bill you should be setting aside for.
Frequently Asked Questions
What is a payment on account?
An advance payment towards next year's tax bill, required when your Self Assessment liability exceeds £1,000. There are two, each 50% of your previous year's bill, due on 31 January and 31 July.
Why is my first tax bill so much bigger than expected?
Because 31 January in a first Self Assessment year carries both the balancing payment for the year just filed and the first payment on account for the next — about 150% of the tax you actually owed for that year.
Can I reduce my payments on account?
Yes, if you genuinely expect a lower bill. But if you reduce them too far, HMRC charges interest on the shortfall backdated to the original due dates, so the estimate needs to be realistic rather than hopeful.
Do payments on account include Capital Gains Tax?
No. They cover income tax and, where applicable, Class 4 National Insurance. Capital gains are settled through the balancing payment, and UK property disposals have a separate 60-day reporting and payment deadline.
When do payments on account stop?
When your liability falls below the £1,000 threshold, or when you leave Self Assessment. Until then they continue automatically, recalculated each year from your latest return.
How much should I set aside in my first year?
Plan for roughly 150% of your expected annual tax bill by 31 January, and the remaining half by 31 July. From year two onwards, the instalments simply become how you pay.
Related Guides
Keep reading with these related guides:
- Self Assessment Walkthrough — filing the return itself
- Tax Year Dates & Deadlines — the full calendar
- Self-Employed vs Limited Company — the structure decision behind the bill
- Freelancer Tax Guide — expenses, classes of NI and record-keeping
- Benefits in Kind and the P11D — the other tax that arrives late
- Self-Employed Tax Calculator — estimate what to set aside
- All Tax Guides
Check your take home pay
See exactly what you'll earn after tax with our free calculator.
Calculate Your Take Home Pay →