Why CIS subcontractors overpay tax, how to work out your refund, and how to get it back faster. Worked example, expenses list and realistic timescales.
Payments on Account: How They Work and How to Reduce Them
October 14, 2026
|
Payments on Account: How They Work and How to Reduce Them
Quick Summary: Payments on account are the single most common cause of a January tax shock, because the first bill arrives at roughly 150% of the figure people have budgeted for. This guide covers what actually determines your position: the two tests that decide whether you have to make them at all, which taxes are included in the calculation and which are excluded entirely, why the inflated bill only happens once and what the cycle looks like in years two and three, the three ways to claim a reduction and the deadline that applies, the grounds HMRC accepts versus the ones it rejects, and why reducing a payment to solve a cash flow problem is usually the wrong tool and an expensive one.
Why the First January Bill Feels Like Double
A sole trader finishes their first full year, works out they owe £3,000, puts £3,000 aside, and logs in to find HMRC wants £4,500.
Nothing has gone wrong. The extra £1,500 is the first payment on account towards the following tax year, and a second £1,500 follows on 31 July. In that twelve-month window they will pay £6,000 against a £3,000 liability.
The system is not charging twice. It is moving a year’s worth of tax from arrears to instalments, and the transition year carries both. Once you understand that, the number stops being alarming and becomes something you can plan for. Until you understand it, it arrives in the last week of January as a problem you have no money for.
The second thing worth knowing straight away is that the inflated bill is a one-off. From the following year the cycle settles into two instalments a year, with the balancing payment usually small or nil. The shock belongs to the first year only.
What Payments on Account Are
Payments on account are advance instalments towards your next Self Assessment bill. HMRC takes your most recent liability as the benchmark, assumes the coming year will be similar, and collects it in two equal halves.
For the 2025/26 tax year, that means 31 January 2027 carries the 2025/26 balancing payment and the first instalment towards 2026/27, with the second instalment following on 31 July 2027.
The legislation calls the benchmark figure the relevant amount: the total income tax assessed, less any income tax already deducted at source. Each payment on account is 50% of it, and a payment on account can never exceed 50% of the relevant amount.
| Date | What falls due |
| 31 January | Balancing payment for the tax year just ended, plus the first payment on account for the current year |
| 31 July | Second payment on account for the current year |
Who Has to Make Them
Two tests decide it, and you have to fail both to be caught.
| Test | You are exempt if… |
| The £1,000 test | Your relevant amount for the previous year was under £1,000 |
| The 80% test | 80% or more of your tax for that year was already collected at source |
The 80% test is the one that catches people out in both directions. An employed person with a modest side business usually clears it, because PAYE already covers most of their tax, so no payments on account arise however large the overall bill. A sole trader with no PAYE income almost never clears it, so a liability of £1,001 is enough to trigger the instalments.
Note that the test is applied to the previous year. Your position can change from one year to the next as your income mix changes.
Late Filing Penalties
These are charged under Schedule 55 of the Finance Act 2009 and apply automatically, whether or not you owe any tax.
| How late | Penalty | Running total |
| 1 day | £100 fixed | £100 |
| 3 months | £10 per day for up to 90 days | Up to £1,000 |
| 6 months | The greater of £300 or 5% of the tax due | Up to £1,300+ |
| 12 months | A further £300 or 5%, whichever is greater | Up to £1,600+ |
Where HMRC finds the failure was deliberate and concealed, the 12-month charge can rise to as much as 100% of the tax due.
There is no tolerance period and no discretion built into the system. The £100 is applied automatically on 1 February.
What Is Included and What Is Not
This is the detail most guides skip, and it is where people miscalculate what they owe.
| In the calculation | Excluded from the calculation |
| Income tax on self-employment profits | Capital Gains Tax |
| Income tax on rental profits | Student loan repayments |
| Income tax on dividends and savings income | Postgraduate loan repayments |
| Class 4 National Insurance | Class 2 National Insurance |
Everything in the right-hand column is payable in full as part of the 31 January balancing payment. None of it is spread across instalments.
That matters most for landlords who sold a property and for anyone still repaying a student loan. A landlord with a capital gain can face a January bill containing the balancing payment, the entire Capital Gains Tax charge, and the first payment on account, all on the same day. The payments on account element gives no relief against the gain at all.
A note on Class 2: the liability to pay it was removed from the 2024/25 tax year onwards, though voluntary contributions remain available for those with profits below the Small Profits Threshold.
Three Years of a Typical Cycle
Take a sole trader whose income tax and Class 4 National Insurance comes to £3,000 a year, steadily, with no tax collected at source.
| Date | What is due | Amount |
| 31 Jan, year 1 | Balancing payment for year 1 (£3,000) plus first instalment for year 2 (£1,500) | £4,500 |
| 31 Jul, year 1 | Second instalment for year 2 | £1,500 |
| 31 Jan, year 2 | Balancing payment for year 2 (£3,000 less £3,000 already paid on account) plus first instalment for year 3 | £1,500 |
| 31 Jul, year 2 | Second instalment for year 3 | £1,500 |
| 31 Jan, year 3 | Balancing payment plus first instalment | £1,500 |
The pattern is clear. One painful January, then two predictable payments a year. Over the full period the trader pays exactly £3,000 a year, the timing moves, not the amount.
Where it stops being predictable is when income changes. If year two’s liability rises to £4,000, the January bill becomes the £1,000 shortfall plus a £2,000 instalment. If it falls to £2,000, the £3,000 already paid on account produces a £1,000 refund.
How to Reduce Them
You can claim a reduction when you genuinely expect the coming year’s liability to be lower. There are three routes and they all reach the same place.
On your tax return: The Self Assessment tax calculation summary includes a box specifically for this: tick it, and enter the reduced amount of each payment on account. This is the easiest route because you are already filing.
Through your HMRC online account: Sign in to your Self Assessment account and select the option to reduce payments on account.
By post on form SA303: The paper claim, for those not filing online.
Two rules govern the claim.
The deadline is 31 January following the tax year the payments relate to. A claim to reduce the 2026/27 payments on account must be made before 31 January 2028.
There is no limit on the number of claims. If circumstances change again, you can revise it. You can also reduce the payments to nil where you expect no liability at all.
Where you have already overpaid an instalment, HMRC can refund the excess, provided the next payment is not due within 30 days.
Grounds That Work and Grounds That Do Not
A claim must rest on a genuine expectation that the liability will be lower. It is a statement about next year’s tax, not a request for more time.
| HMRC generally accepts | HMRC generally rejects |
| You have ceased trading | You cannot afford the payment |
| You lost a major client or contract | You would prefer to pay later |
| You sold the rental property producing the income | You are hoping income will fall |
| Last year included one-off income that will not repeat | Your accountant said it was worth a try |
| You have moved to employment, so PAYE now covers more | You want to keep the cash in the business |
| You are making a large pension contribution | — |
| A substantial capital allowances claim is coming | — |
| You have reduced your hours or scaled the business back | — |
The left-hand column shares one feature: something concrete has changed, and you could explain it in a sentence if asked. The right-hand column describes a cash flow problem, which is a real problem with a different solution.
The Cost of Reducing Too Far
This is the part that is easy to overlook, because nothing happens at the time. HMRC accepts the reduced figure without argument and the lower amount is collected.
The reckoning comes when you file the return. If your actual liability turns out higher than the reduced instalments, HMRC charges late payment interest on the shortfall, backdated to the original 31 January and 31 July due dates. You are treated as having paid late all along.
Working example: Your payments on account were set at £2,500 each. You reduced both to £1,000. Your actual liability comes in at £4,800.
| Amount | |
| January instalment shortfall | £1,500 |
| July instalment shortfall | £1,500 |
| Interest on the January shortfall, backdated 12 months at 7.75% | approx. £116 |
| Interest on the July shortfall, backdated 6 months at 7.75% | approx. £59 |
| Interest cost of the reduction | approx. £175 |
The £3,000 was always going to be payable. The £175 was avoidable.
Where HMRC concludes a claim was made fraudulently or negligently, a penalty can follow on top. A reduction supported by a real change in circumstances will not attract one. A reduction made because the money was not there might.
Reducing or Time to Pay: Which Problem Do You Actually Have?
These get confused constantly, and picking the wrong one costs money.
Use a claim to reduce when you expect to owe less. The liability itself is genuinely falling.
Use Time to Pay when you expect to owe the same but cannot pay it on the due date. A Time to Pay arrangement can be set up online for Self Assessment debt up to £30,000, spread over up to 12 months, provided your returns are up to date and you apply within 60 days of the payment deadline.
Both carry interest. Only one carries the risk of a penalty for an unfounded claim. If the issue is cash rather than income, Time to Pay is the correct instrument and it is designed for exactly that situation.
When Payments on Account Stop
They are not permanent. The requirement falls away for a tax year whenever your final liability for that year comes in below £1,000, or 80% or more of your tax is collected at source.
In practice that means payments on account stop when you cease trading, when you move to employment and PAYE picks up most of your tax, or when your profits fall below the threshold. Anything you have already paid on account that exceeds the final liability is either refunded or set against the next amount due.
If you have stopped trading, make the claim rather than waiting for the system to notice. HMRC works from the last return it holds, so the instalments will keep being demanded until you tell it otherwise.
Mistakes That Cost Money
- Budgeting only for the balancing payment. The first January bill is roughly 150% of the liability, not 100%.
- Forgetting 31 July exists. It is the quietest deadline in the calendar and the one most often missed.
- Assuming Capital Gains Tax is spread. It is not. It lands in full on 31 January.
- Reducing to manage cash flow. That is what Time to Pay is for.
- Reducing and then forgetting. If income recovers, the reduced figure is still in place and the shortfall accrues interest from the original dates.
- Not claiming after ceasing to trade. The demands continue until you make the claim.
- Treating the money as yours. Each installment is tax already earned. Setting aside a percentage of every invoice as it arrives is the only reliable way to meet them.
Putting It Into Practice: A Quick Checklist
- Checked whether your previous liability exceeded £1,000 and whether less than 80% was collected at source
- Worked out the January figure as the balancing payment plus half the previous year’s liability
- Diarised 31 July as well as 31 January
- Confirmed whether Capital Gains Tax or student loan repayments fall into your January balancing payment
- Assessed whether this year’s income is genuinely lower before considering a reduction
- Made any reduction claim on the tax return, through your HMRC online account, or on form SA303
- Checked the claim deadline of 31 January following the tax year the instalments relate to
- Revisited a reduction claim if income has recovered since you made it
- Used Time to Pay rather than a reduction where the problem is cash rather than profit
- Made a claim to reduce to nil if you have ceased trading
- Started setting aside a fixed percentage of each payment received, rather than finding the money in January
Key Takeaways
- Payments on account are advance instalments due on 31 January and 31 July, each equal to 50% of the previous year’s relevant amount.
- They apply where your previous liability exceeded £1,000 and less than 80% of your tax was collected at source.
- The first January bill is roughly 150% of the liability because it carries the balancing payment and the first instalment together; this happens only once.
- Income tax and Class 4 National Insurance are included; Capital Gains Tax, student and postgraduate loan repayments and Class 2 National Insurance are excluded and payable in full on 31 January.
- You can claim a reduction on your tax return, through your HMRC online account, or on form SA303, up to 31 January following the tax year concerned.
- Reducing too far means late payment interest backdated to the original due dates, and a penalty where the claim was negligent.
- Cash flow problems are solved with Time to Pay, not with a reduction claim.
Frequently Asked Questions
- What are payments on account?
Advance installments towards your next Self Assessment bill, each equal to 50% of your previous year’s income tax and Class 4 National Insurance after deducting tax collected at source. They fall due on 31 January and 31 July.
- Why is my January tax bill so much higher than I calculated?
Because it contains two things: the balancing payment for the tax year just ended, and the first payment on account for the current year. On a £3,000 liability that produces a £4,500 bill. It happens in your first year of payments on account and then settles down.
- Who is exempt from payments on account?
Anyone whose previous liability was under £1,000, and anyone for whom 80% or more of their tax was already collected at source, typically through PAYE. Employed people with small side incomes are often exempt on the second test regardless of the amount.
- Do payments on account include Capital Gains Tax?
No. Capital Gains Tax, student loan repayments and postgraduate loan repayments are all excluded from the calculation and are payable in full as part of the 31 January balancing payment.
- How do I reduce my payments on account?
Tick the relevant box on your Self Assessment tax calculation summary and enter the reduced figures, use the reduce option in your HMRC online account, or submit form SA303. The claim must be made before 31 January following the tax year the payments relate to, and you can make more than one claim.
- What happens if I reduce them too much?
HMRC charges late payment interest on the shortfall, backdated to the original 31 January and 31 July due dates, so you are treated as having underpaid from the start. Where the claim was fraudulent or negligent, a penalty can be added.
- Can I reduce payments on account because I cannot afford them?
No. A reduction claim must be based on a genuine expectation of a lower liability. If the liability is unchanged but the cash is not available, the right route is a Time to Pay arrangement, which can be set up online for debts up to £30,000 over 12 months.
Conclusion
Payments on account do not increase anyone’s tax. They move its timing, and the whole of the difficulty sits in the first year, when one January bill carries a full year in arrears and half a year in advance at the same time. Understood in October, it is a number to plan for. Discovered on 30 January, it is a crisis.
Two habits remove the problem entirely. Set aside a fixed percentage of every payment you receive, so the money exists before the deadline does. And if your income has genuinely fallen, claim the reduction properly when you file rather than paying installments based on a year that no longer reflects your business, while remembering that cutting them below what you will actually owe just buys an interest charge.
At Aksons Accounting we calculate payments on account as part of every Self Assessment return we prepare, and we tell clients what January and July will cost well before either arrives. If you are facing a January bill larger than you expected, or you think your instalments are based on a year that is no longer representative, send us your figures and we will work out whether a reduction claim is justified.
Related Articles & News
Why CIS subcontractors overpay tax, how to work out your refund, and how to get it back faster. Worked example, expenses list and realistic timescales.
Why CIS subcontractors overpay tax, how to work out your refund, and how to get it back faster. Worked example, expenses list and realistic timescales.
How to file your confirmation statement (CS01), work out your real deadline, and what happens if you miss it, including strike-off and how to stop it.
Directors of close companies can take £300 a year in tax-free trivial benefits. Learn the four HMRC conditions, the £50 rule, and the traps that cost the exemption.
A complete guide to the Construction Industry Scheme: deduction rates, registration, gross payment status, monthly returns and the April 2026 CIS changes.
The UK VAT registration threshold is £90,000. Learn how the rolling 12-month test works, your real deadline, and what late registration actually costs.
HMRC mileage rates rose to 55p per mile from 6 April 2026, the first rise in 15 years. Full rate tables, worked examples, and how to claim what you are owed.
Companies House identity verification is now a legal duty. Find your actual deadline, get your personal code, and avoid a blocked confirmation statement.
Electric vehicle tax relief for UK businesses explained: 100% first year allowances, VAT rules and 2026/27 BIK rates for company cars and sole traders.
Learn how dividends work for UK limited companies, including distributable profits, dividend tax rates, paperwork, salary vs dividends and common mistakes.
UK Company Formation Statistics: Trends, Insights & Business Advice | Aksons Accounting Services Ltd
Explore the latest UK company formation statistics and discover what they mean for new business owners. Learn practical accounting, tax and compliance insights from Aksons Accounting Services Ltd.
Learn about the new HMRC rules for 2026, including digital reporting, record keeping, tax compliance, and practical steps UK businesses can take to stay compliant and improve financial management.
Learn the Child Benefit tax rates for 2026, understand the High Income Child Benefit Charge, adjusted net income, Self Assessment obligations, and practical tax planning strategies for UK families.
Discover the key takeaways from the Spring Statement 2026 and what they mean for UK businesses, sole traders, and company directors. Learn how to respond to policy changes, strengthen financial planning, and prepare for evolving compliance requirements.
Learn how Making Tax Digital for Income Tax will affect sole traders, freelancers, and landlords. Understand quarterly reporting, compliance requirements, common challenges, and how to prepare before the new HMRC rules take effect.
Learn what the Companies House WebFiling security issue means for UK businesses, the risks of filing fraud, identity verification changes, and the steps directors can take to protect company records and strengthen compliance.
Learn how to complete your Self Assessment tax return in 2026, including deadlines, allowable expenses, payments on account, landlord income, freelancer taxes, and common HMRC filing mistakes.
Learn the latest Companies House filing fees in 2026, including confirmation statement costs, late filing penalties, company incorporation fees, and the hidden compliance risks UK businesses often overlook.
Learn the key ICO responsibilities for UK businesses in 2026, including ICO registration, GDPR compliance, data breach rules, subject access requests, CCTV obligations, marketing consent, and SME data protection risks.
A 2026 guide to UK average wage trends, including the latest salary figures, minimum wage changes, real pay growth, regional pressure, and what the numbers mean for businesses and workers.
From April 2026, HMRC’s Making Tax Digital rules will begin changing how sole traders and landlords report income tax. For many businesses, this is not just another compliance update. It changes the rhythm of financial management itself.
Choosing between sole trader and limited company status sets the tax you pay, the paperwork you file, and the personal risk you carry. The right answer depends on your profits, your sector, and your appetite for admin.