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Making Tax Digital is live — are you compliant or facing a £200 fine?
9 min read
If you're newly self-employed, or your earnings have just crossed the threshold where you need to file a Self Assessment, January can deliver a nasty shock. You dutifully fill out your return, expect a tax bill of £4,000, and HMRC casually informs you that you actually owe £6,000.
No, the calculator isn't broken. You've just been introduced to the Payment on Account (POA).
Payments on account are widely considered the most misunderstood and frustrating part of the UK tax system. Here is a plain-English explanation of exactly what they are, why you owe them, and how to prepare for the January sting.
What Is a Payment on Account and Why Do You Owe It?
A payment on account is simply an advance payment towards your next year's tax bill.
For employees on PAYE, HMRC collects tax every single month. But for the self-employed, tax is paid in arrears. To prevent you from holding onto a full year's worth of tax (and to protect the Treasury's cash flow), HMRC requires you to pay half of your estimated tax bill upfront.
This means your January tax bill isn't just settling your debt for the previous year; it also includes a massive down payment for the year you are currently in.
How Payment on Account Is Calculated
HMRC assumes your income next year will be exactly the same as your income this year. They look at your total tax and National Insurance bill, divide it by two, and that becomes your Payment on Account.
Worked Example — £4,000 SA Tax Bill
Imagine you are filing your 2025/26 tax return in January 2027. Your total tax and Class 4 NI for the year comes to £4,000.
- 31 January 2027: You must pay the £4,000 you owe for 2025/26.
- 31 January 2027 (POA 1): You must also pay £2,000 (50% of £4,000) as your first payment towards 2026/27.
- Total due in January: £6,000.
Then, six months later, you make the second advance payment:
- 31 July 2027 (POA 2): You must pay another £2,000 as your second payment towards 2026/27.
The Three SA Payments You Make Each Year
If you fall into the POA system, you will permanently be in a cycle of making three payments:
- First Payment on Account (31 January): 50% of the previous year's bill.
- Second Payment on Account (31 July): 50% of the previous year's bill.
- Balancing Payment (31 January): Settling any remaining difference once your actual earnings are finalized.
Can You Reduce Your Payment on Account?
Yes. Because POA assumes you will earn exactly the same amount next year, it can be wildly inaccurate for freelancers with fluctuating incomes.
When to Reduce (and When Not To)
If you know your profits are going to be lower this year—perhaps you lost a major client, went on maternity leave, or had higher expenses—you can ask HMRC to reduce your payment on account.
What Happens If You Reduce Too Much
You must be careful. If you aggressively reduce your POA to avoid paying in January, but your final tax bill ends up being higher than you estimated, HMRC will charge you interest on the shortfall. In 2026, this interest rate is hovering around 6.75%. You cannot use a POA reduction as a cheap loan from the government.
January and July Deadlines — What's Due When
Missing these deadlines is expensive. A late payment triggers a £100 fixed penalty, plus daily interest on the outstanding amount.
- 31 January: Balancing payment for last year + First POA for this year.
- 31 July: Second POA for this year.
Frequently Asked Questions
What is a payment on account in Self Assessment?
It's an advance payment towards your next year's tax bill. HMRC makes you pay 50% of your previous year's SA tax liability in January, and another 50% in July. The idea is to spread the tax burden rather than face one large bill the following January.
Do I always have to make payments on account?
No. POA only applies if your previous year's SA tax bill was over £1,000 AND less than 80% of your total tax was collected through PAYE at source. If you're under that threshold, you only pay once.
Can I reduce my payment on account?
Yes. You can apply to reduce if you expect your income to be lower in the coming year. But HMRC charges interest (currently ~6.75%) if you under-reduce and your actual bill turns out higher, so be realistic.
What happens if I don't pay my payment on account on time?
You'll face a £100 fixed penalty for late filing, plus daily interest on the outstanding amount at the Bank of England base rate + 2.5% (approximately 6.75% in 2026).
🔢 Calculate your exact POA amounts before January.
Use our Payment on Account Calculator to see what you owe on 31 January and 31 July.