Payments on Account Explained — Why Your Second Year Self-Employed Hits Harder

Published April 2026 · 7 min read · By Solofold

Every year, thousands of UK freelancers and sole traders get an unpleasant surprise in January. They expect a tax bill for the year they just finished — and instead receive a bill that's roughly 50% larger than they anticipated. The extra amount is called Payments on Account, and it catches people off guard because nobody warns you about it until the bill arrives.

This guide explains what Payments on Account are, how they're calculated, and — most importantly — how to plan for them so January isn't a crisis.

What are Payments on Account?

Payments on Account are advance payments towards your next year's tax bill. HMRC assumes your income will be similar to this year, so they collect tax in advance — essentially making you pre-pay half of next year's estimated liability.

They apply whenever your Self Assessment tax bill is more than £1,000 and less than 80% of your tax was collected at source (e.g., through PAYE).

A worked example that shows why it hurts

Let's say you're a freelance consultant. In your first full tax year (2024-25), you earn £45,000 profit. Your tax bill breaks down as follows:

Here's what you'd expect to pay in January 2026: £8,741.

Here's what HMRC actually asks you to pay in January 2026:

Instead of £8,741, you owe £13,112 in January — nearly 50% more. The extra £4,371 is an advance payment towards your 2025-26 tax bill. You'll pay another £4,371 in July, and then a "balancing payment" the following January to settle any difference.

The payment timeline

Once Payments on Account kick in, your tax payment schedule looks like this every year:

This means you're always paying tax in advance. The system catches up with itself after the first year, but that first January is the shock — because you're paying the full previous year's tax plus half of the next year's advance in one go.

Can you reduce Payments on Account?

Yes. If you know your income will be significantly lower next year, you can apply to reduce your Payments on Account through your Self Assessment online account. HMRC calls this "claiming to reduce."

Warning: If you reduce your payments and your actual tax bill turns out to be higher than the reduced amount, HMRC charges interest on the underpayment. Only reduce if you're genuinely confident your income is dropping. If in doubt, pay the full amount — you'll get the overpayment refunded (or offset against next year's bill).

How to prepare (so January doesn't hurt)

1. Know the number early. Don't wait until your accountant tells you in December. Calculate your estimated tax and Payments on Account as early as possible — ideally by September — so you have 4 months to save.

2. Set aside tax monthly. The moment income hits your account, move a percentage to a separate savings account. A rough guide: set aside 25-30% of every payment you receive. This builds a tax fund that's ready when HMRC calls.

3. Track expenses properly. Every legitimate expense you claim reduces your tax bill — which also reduces your Payments on Account (since they're based on this year's bill). Missing expenses means overpaying twice: on this year's tax and on next year's advance. See our guide to SA103S expense categories for what you can claim.

4. Use a tool that surfaces the number. Most freelancers are blindsided because their bookkeeping doesn't calculate Payments on Account — they only find out when the bill arrives. A tool that shows you the Payments on Account figure alongside your regular tax estimate removes the surprise entirely.

Related resources

→ SA103S Expense Categories Explained

→ Free UK Rental Tax Calculator

→ All Solofold products