Free Tool
Payments on Account Calculator
Work out your 31 January and 31 July instalments, your balancing payment, and the number that actually catches people out: the total due in January.
Income tax plus Class 4 National Insurance, before any payments on account. It is the figure your payments on account are calculated from.
Your best estimate. Leave it blank if you only want to see the instalments.
What a Payment on Account Actually Is
HMRC asks you to pay next year’s tax in advance, in two instalments, based on what you owed last year. Each instalment is half of last year’s bill. One falls on 31 January, alongside everything else. The other falls on 31 July on its own.
The logic is that employed people pay tax as they earn through PAYE, so HMRC wants the self employed on something closer to the same footing. The effect for a trade business is that your tax is due before you have necessarily earned the profit it is calculated on.
When You Have to Make Them
- Your last Self Assessment bill was £1,000 or more, and
- Less than 80% of your tax was already collected at source, through PAYE or CIS deductions.
- Fail either test and you make no payments on account at all, and simply pay the bill in one go on 31 January.
That second test is why plenty of CIS subcontractors never see a payment on account. If 20% has already been deducted from nearly everything you invoiced, most of your tax is paid at source and the threshold is not met.
Why January Is Always Worse Than People Expect
This is the part that catches trades every single year. On 31 January you are not paying one thing, you are paying two.
First, the balancing payment: last year’s actual bill, less whatever you already paid on account. Second, the first payment on account towards the year you are currently in, which is half of the bill you have just settled.
So a business whose profits went up has a double hit. The balancing payment is larger than expected because last year was better than the year before, and the new instalment is calculated on that larger figure. A good year is followed by a January that feels like a punishment for it.
Reducing Your Payments on Account
You can apply to reduce them if you genuinely expect to earn less this year than last, which happens often enough in the trades: a quiet year, an injury, a big contract that did not repeat.
The catch is worth understanding. If you reduce them too far and end up owing more than you paid, HMRC charges interest on the shortfall from the original due dates, not from when you found out. Reducing on a hunch is an expensive habit.
Reduce them on evidence, not optimism. If your first six months are clearly down on last year, that is evidence. If you just do not fancy the payment, that is not.
Putting Money Aside So It Is Not a Shock
The habit that works is a separate account and a fixed percentage of every payment that lands, moved across the same day it arrives. Most sole trader trades find somewhere between 25% and 30% covers income tax and Class 4 National Insurance comfortably.
It sounds obvious. Almost nobody does it, which is why January is the single most stressful month in the trades and why HMRC time to pay arrangements are as common as they are.
Frequently Asked Questions
What is a payment on account?
It is an advance payment towards your next Self Assessment bill. HMRC asks for two instalments, each of half your previous year’s tax bill, due on 31 January and 31 July. They are then set against your actual bill when it is calculated, with any difference settled as a balancing payment.
Do I have to make payments on account?
Only if your last Self Assessment bill was £1,000 or more and less than 80% of your tax was deducted at source. Many CIS subcontractors fall outside the regime entirely, because 20% has already been deducted from most of what they invoiced.
Why is my January tax bill so much bigger than I expected?
Because 31 January carries two payments, not one. You settle the balancing payment for the year just filed, then immediately make the first payment on account for the year you are in, which is half of the bill you have just settled. If your profits rose, both numbers rise together.
Can I reduce my payments on account?
Yes, if you genuinely expect to earn less this year. You can apply through your Self Assessment account or by form SA303. Be careful though: if you reduce them and end up owing more, HMRC charges interest on the shortfall running from the original due dates, so only reduce where you have real evidence of lower earnings.
What happens if I miss the 31 July payment?
Interest starts accruing from the day after it was due. Unlike a late filed return there is no automatic fixed penalty for a late payment on account, but interest runs until it is paid and the amount rolls into what you owe in January. If you cannot pay, contact HMRC about a time to pay arrangement rather than going quiet.
How much should I put aside for tax as a sole trader?
Most trade businesses find 25% to 30% of every payment received covers income tax and Class 4 National Insurance. Move it to a separate account on the day the money lands rather than at the end of the month, because the pot only works if it is never available to spend.
Based on the standard Self Assessment payment on account rules for UK sole traders. General guidance for trade businesses rather than advice for your circumstances, so confirm anything material with your accountant or on gov.uk.
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