You do the sums. You know roughly what you earned. You brace yourself for the tax bill — and then it lands looking like HMRC has accidentally charged you for two people. If that has happened to you, payments on account are probably the reason.
It catches a lot of new freelancers and sole traders completely off guard. Not because they did anything wrong, but because nobody explained how the system works before the bill landed.
I always think this is one of the cruellest bits of freelancer admin: the bill is technically logical, but it arrives at exactly the moment most people are least emotionally prepared for another tax-shaped surprise.
What are payments on account?
Payments on account are advance payments toward your next Self Assessment tax bill. HMRC asks you to make them twice a year, based on what you owed in the previous tax year.
The idea is straightforward from HMRC's perspective: instead of waiting until January every year to collect tax on self-employed income, they ask you to pay some of next year's expected bill in advance. Two instalments — one in January, one in July.
Each payment is typically half of your previous year's tax bill. So if you owed £2,000 last year, HMRC expects two payments of £1,000 across the following year to cover what they anticipate you will owe again.
Worth noting: payments on account generally cover income tax and Class 4 National Insurance if you are self-employed. They do not usually cover things like student loan repayments or capital gains tax, which are dealt with separately on the final bill. Check current HMRC guidance before relying on the details, because the rules can change.
Why can the bill feel like double?
Here is where first-year self-employed people get a shock.
Your first January Self Assessment deadline does not just ask for the tax you owe on the previous year's income. It asks for that plus the first payment on account toward the current year.
So the bill has two parts stacked together: a balancing payment for what you already owe, and an advance payment for what HMRC thinks you will owe in the year ahead. The second instalment then follows in July.
A simple illustration: imagine your tax bill for your first year of self-employment works out at £3,000. In January, HMRC asks for that £3,000 plus £1,500 as the first payment on account. That is £4,500 due in one go. Then another £1,500 comes due in July. In that first year, you end up paying £6,000 across two deadlines — even though you only "owed" £3,000 on last year's income.
Those advance payments are not wasted. They count toward your next bill. But the cash-flow hit in year one is real, and it catches people out every January.
Who usually gets asked to make payments on account?
Not everyone has to make them. HMRC applies payments on account based on the size of your previous Self Assessment bill and how much was collected through PAYE. The exact thresholds can change, so check the current HMRC guidance or speak to an accountant rather than relying on figures from a blog post — including this one.
Generally speaking, if your Self Assessment tax liability is small, or if most of your income is already taxed at source through PAYE, you may not be required to make payments on account at all. But if you are self-employed as your main income, or your untaxed income is significant, it is worth assuming you will need to.
Why this catches new freelancers and side hustlers out
Most people come into freelancing from employment. In a regular job, tax is taken from your pay before it reaches you. You never see it, never have to move it somewhere safe, never have to remember to pay it. It just disappears quietly every month.
Self-employment works the other way around. The money arrives in your account in full. The tax comes later — sometimes much later — as a lump sum. For people new to this, it is genuinely easy to spend money that is not really yours to spend.
Then January arrives. You owe more than you saved for, and you still have next year's advance payment sitting on top of it. This is not a rare edge case. It happens constantly to new freelancers and people with side hustle and second income who underestimate the deferred nature of self-employed tax.
Our self-employed tax guide covers the broader landscape if you want more context on how UK self-employment tax works from the ground up.
How to plan for payments on account
The good news is that once you understand the system, it is entirely manageable. The key is treating tax as a running obligation, not a January problem.
The single most useful habit is setting money aside every month as income arrives. A separate account or savings pot just for tax makes this much easier to manage. Out of sight, harder to accidentally spend.
How much to set aside depends on your income and circumstances. Some self-employed people use a rough working percentage as a starting point, then check it against an actual estimate once they have real profit numbers. The danger is treating a rule of thumb as if it were your actual tax bill.
Use the tool to estimate your self-employment tax early so you are not guessing in December.
The other thing worth doing is estimating your tax position before January, not in January. If you have a rough sense of your profit by October or November, you can check whether your savings are on track before the deadline is breathing down your neck. You can also estimate your UK income tax to get a clearer picture.
And if you want to build tax payments into your monthly budget properly rather than treating them as a separate problem, a budget calculator can help you work out what to set aside alongside your other regular costs.
What if your income drops?
Payments on account are based on the previous year. If your income has genuinely fallen, you may be able to apply to reduce them — HMRC does allow this. But be careful: if you reduce them and your actual bill turns out to be higher than expected, you will owe the difference plus interest.
If your income has dropped significantly — maybe a big client left, or you took time off, or business has been quieter — it is worth looking into this properly, ideally with an accountant who can help you work out what is sensible. Understand what happens if things go wrong too: our article on what happens if you underpay tax explains the consequences of getting the numbers wrong.
A simple example
To make this concrete: imagine someone starts freelancing and in their first year they make a profit that results in a £2,400 tax bill.
The following January they do not just owe £2,400. They owe:
- £2,400 — the balancing payment for the tax year just ended
- £1,200 — the first payment on account toward the current year (50% of last year's bill)
Total due in January: £3,600.
Then in the following July, another £1,200 is due.
None of this is extra tax in the long run — those advance payments reduce the following January's bill. But in year one, the cash-flow impact is sharp. Anyone who saved only £2,400 for that January deadline is going to be £1,200 short before they even open the return.
What to do next
If you are new to self-employment, the most practical thing you can do right now is start tracking your income and setting tax money aside every month. Do not wait until the end of the tax year to think about it.
Get an early estimate of your liability so January is not a surprise. Estimate your self-employment tax using our calculator, and read our broader self-employed tax guide if you want to understand how all the pieces fit together.
Frequently asked questions
Why is my first Self Assessment bill so high?
It is likely because your bill includes both the tax owed on the previous year's income and the first payment on account toward the current year. This double-up effect is common in the first year and takes many people by surprise.
Are payments on account extra tax?
No. They are advance payments toward your next bill. If you end up paying too much in advance, the excess is refunded or credited against future bills. They feel like extra money going out, but they reduce what you will owe the following January.
Can I reduce payments on account?
You may be able to apply to reduce them if your income has genuinely fallen. However, if you reduce them too much and your actual bill is higher, HMRC will charge interest on the shortfall. Check current HMRC guidance or take advice before doing this.
Do side hustles trigger payments on account?
Potentially yes, depending on the size of the tax owed on that income and how much is already collected through PAYE. If your side hustle generates a meaningful Self Assessment liability, payments on account may apply. Check current HMRC rules for the thresholds.
How can I save for payments on account?
The simplest method is to set aside a percentage of every payment you receive into a separate account as you go. Estimating your tax liability mid-year rather than waiting until January also helps you check that your savings are sufficient before the deadline arrives.