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Making Tax Digital is live โ are you compliant or facing a ยฃ200 fine?
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Your HMRC Self Assessment bill has arrived, and thanks to Payments on Account (POA), it's significantly larger than your actual tax liability. If you're expecting to earn less this year than you did last year, paying HMRC an inflated advance payment can cause a severe cash flow crisis.
The good news? You don't have to pay it. You have a legal right to reduce your Payment on Account. Here is a step-by-step guide on how to do it in 2026, when it makes sense, and the risks involved if you get it wrong.
When Does It Make Sense to Reduce Your Payment on Account?
Payments on account are calculated based on the assumption that your business will make the exact same profit this year as it did last year. You should apply for a reduction if:
- You have lost a major client or your industry is experiencing a downturn.
- You are taking time off (e.g., maternity, paternity, or extended sick leave).
- You have transitioned to a PAYE job and your self-employed income has dropped.
- You have made a massive capital purchase (like a new van or machinery) that will increase your expenses and lower your taxable profit.
How to Apply for a Reduction — Online Step by Step
The fastest and most reliable way to reduce your POA is through your HMRC online account. You can do this immediately after filing your tax return, right up until the payment deadline.
- Log in to your HMRC Personal Tax Account using your Government Gateway ID.
- Select Self Assessment, then click View your tax return.
- Scroll down and select Reduce payments on account.
- The system will ask you to enter the new total you expect your tax bill to be for the upcoming year. It will then automatically halve this figure to calculate your new POA instalments.
- You will be asked to select a reason from a drop-down menu (e.g., "My business profits are down" or "My allowances have changed").
- Click Submit. Your dashboard should update immediately to reflect the new, lower amount due.
What HMRC Needs to Accept Your Reduction
HMRC does not usually ask for a 20-page business plan or profit-and-loss spreadsheet when you hit submit. The system is largely based on trust. As long as you provide a sensible estimate and select a valid reason from the drop-down menu, the reduction is applied automatically.
The Risk — Interest Charges If You Underpay
Because the system is based on trust, HMRC has a harsh penalty mechanism to stop people abusing it. If you reduce your POA to zero just to avoid paying in January, but you actually end up having a profitable year, you will be heavily penalized.
Example: How Much Interest Accrues on a £1,000 Shortfall
Let's say you reduce your POA by £1,000. When you finally file your return the following year, it turns out you actually owed that £1,000.
HMRC will backdate interest on that £1,000 from the day it was originally due (either 31 January or 31 July). With HMRC's late payment interest rate hovering around 6.75% in 2026, a £1,000 underpayment could cost you an additional £67 just in interest, and potentially trigger closer scrutiny of your accounts in the future.
What Is a Balancing Payment and How Does It Interact With POA?
Even if you reduce your POA correctly, you still have to settle the final bill. When the tax year ends and you submit your actual figures, HMRC compares what you owe against the reduced POA you paid.
If you still owe a little more, you make a Balancing Payment on the following 31 January. If you overpaid (because your income dropped even more than you estimated), HMRC will issue you a refund.
Frequently Asked Questions
How do I reduce my payment on account online?
Log into your HMRC Personal Tax Account or Self Assessment online service. Go to "View your tax return" then "Reduce payments on account." You'll need to enter your estimated income and provide a reason for the reduction.
What is the deadline to reduce my payment on account?
You can apply to reduce right up to the payment due date (31 January or 31 July). However, applying earlier means less chance of confusion. HMRC can also process reductions after you've paid if your actual income turns out lower.
What is a balancing payment?
After the tax year ends, HMRC calculates your actual tax bill. If your two POA payments were less than the actual bill, the difference (the balancing payment) is due on 31 January of the following year, alongside POA 1 for the new year.
๐ข See your POA amounts and whether reducing makes sense.
Use our Payment on Account Calculator.