What payment on account means, why HMRC asks for it, how the two instalments are worked out, and how to reduce or check yours for the 2026/27 tax year.
If you have just filed your first Self Assessment return and the number at the bottom is far bigger than the tax you actually owe, you have almost certainly met payment on account. It catches nearly every new freelancer off guard, and it is the single most common thing I get asked about by people using NetPay to work out their self-employed take-home pay.
The short version is that HMRC is asking you to pay some of next year’s tax early. It is not a penalty and it is not a mistake. But the first time you see it, it looks like one.
Payment on account is an advance instalment towards your next tax bill, based on the assumption that you will earn roughly the same next year as you did this year.
HMRC does not want to wait a full extra year to collect tax from people who are no longer having it deducted automatically through PAYE. So once you cross a threshold, it starts collecting in advance, in two chunks.
You get pulled into payment on account when both of these are true for the tax year you have just filed:
If your bill is under £1,000, you are out. If you have a day job where PAYE already covers most of your tax and your freelance side is small, you are usually out too. It is the full-time self-employed and the higher earners who reliably get caught.
That 80% rule is why a freelancer with a small amount of PAYE income can still owe payment on account, while someone with a large salary and a tiny bit of freelancing might not. HMRC is looking at the proportion of your total tax that was already handled for you, not the raw amount.
Each payment on account is half of your previous year’s tax bill. There are two of them, so across the year they add up to a full year’s tax paid in advance.
Here is where it bites for first-timers. In your first January, you pay:
Then in July you pay the second payment on account: the other half.
Worked example. Say your first Self Assessment bill for the 2025/26 tax year comes to £3,000, and none of your tax was collected at source.
The extra £3,000 is not lost. It sits against your 2026/27 tax. When you file that return, HMRC works out what you really owed, subtracts the £3,000 you already paid in advance, and you settle the difference. From year two onwards it smooths out, because you are always half a step ahead. It is only the first year that feels brutal, because you are effectively paying eighteen months of tax in one go.
Payment on account covers income tax and, for the self-employed, Class 4 National Insurance. It does not include your Class 2 National Insurance or anything owed towards a student loan through Self Assessment, those are added to the balancing payment instead. If you want to sanity check what your combined income tax and National Insurance should look like on your earnings, the NetPay app breaks it down.
Two deadlines matter, and missing them means interest:
So for the 2025/26 tax year, the balancing payment and first instalment are due by 31 January 2027, and the second instalment by 31 July 2027. Put both in your calendar the moment you file, because the July one is the one people forget.
The whole system assumes next year looks like last year. Sometimes it will not. Maybe you lost a big client, went part-time, took a salaried job, or had a one-off spike this year that will not repeat.
In that case you can apply to reduce your payments on account. You do it through your HMRC online account or on form SA303, and you can adjust both instalments down to what you genuinely expect to owe.
Here is what I would check first before reducing anything. Be honest with the estimate. If you cut your payments to the bone and then earn more than you predicted, HMRC charges interest on the amount you underpaid, backdated to the original due date. The current late-payment interest rate is set by HMRC and moves with the Bank of England base rate, so it is not trivial. Reducing your payment on account is a tool for a genuine drop in income, not a way to delay a bill you know is coming.
If your income has gone up, you do not need to do anything in advance. You just pay the balance when you file, and your following year’s payments on account rise to match.
Do not rely on memory or on last year’s number. Check the source:
If the numbers in your accounts do not match what you expected, the calculation on gov.uk is the one that counts. You can read HMRC’s own guidance at gov.uk/understand-self-assessment-bill.
The mechanics of payment on account have not changed for the 2026/27 tax year. The £1,000 trigger, the 80% rule, the two half-year instalments, and the 31 January and 31 July dates are all the same as they have been for years.
What does change year to year is the interest rate HMRC applies to late or reduced payments, and the underlying tax and National Insurance rates that decide the size of your bill in the first place. The personal allowance is frozen at £12,570 for 2026/27, so if your freelance profit has grown, more of it is falling into taxable bands, which quietly pushes your payments on account up as well.
One genuine change worth knowing about is Making Tax Digital for Income Tax. From April 2026 it started applying to self-employed people and landlords with qualifying income over £50,000, bringing in quarterly digital updates. It changes how and when you report, but it does not change the payment on account rules themselves. If your income is under that threshold, nothing about your reporting has changed yet.
If you want to see what your self-employed take-home actually looks like once income tax and National Insurance come out, so the January bill stops being a surprise, the NetPay app works it out for you. Free to download.
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NetPay does this maths for every shift, invoice and payslip, automatically.
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Payment on account is an advance payment towards next year's tax bill. HMRC asks for it when your Self Assessment bill is more than £1,000 and less than 80% of your tax was already collected at source. You pay it in two instalments, each worth half of your previous year's bill.
The first payment on account is due by 31 January, at the same time as your balancing payment for the year just gone. The second is due by 31 July. So a first-time freelancer often faces one and a half years of tax in a single January.
Yes. If you know your income has fallen and next year's bill will be lower, you can apply to reduce each payment through your HMRC online account or on the SA303 form. Be careful though, if you reduce it too far and end up owing more, HMRC charges interest on the shortfall.
Only if your first Self Assessment bill comes to more than £1,000 and most of your tax was not already deducted at source. If it does, your first January bill includes the tax you owe plus the first payment on account, which is why it can feel so steep.
Want to see your actual take-home pay?
NetPay UK works out your real net pay after tax, NI, pension and salary sacrifice, for hourly, shift and variable-income workers. Free to download.
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A note on financial advice: NetPay UK calculates take-home pay based on official HMRC tax rules. This article reflects rules in force at the time of publication (3 July 2026). Tax rules change. For complex situations, consult a qualified UK accountant or visit gov.uk/income-tax.
