Payments on account: the tax bill surprise that catches every second-year subbie

Published August 2026 · 7 min read

Ask any accountant which bill shocks new sole traders most and you’ll get the same answer: the second-year January payment. Not because tax went up — because of payments on account, HMRC’s system for collecting next year’s tax in advance. Understand it once and it never ambushes you again.

The rule

If your Self Assessment bill is over £1,000 (and less than 80% of your tax was collected at source), HMRC assumes next year will look like this year and asks for it in advance:

• 31 January: the balance for the year just ended plus 50% of that amount towards the coming year.
• 31 July: the second 50%.

A worked example

Dan the groundworker’s first-year bill is £4,000. In January he pays:

• £4,000 for the year that’s finished, plus
• £2,000 — first payment on account for the current year.

£6,000 in one go — then another £2,000 in July. From then on the cycle repeats: each January settles any balance (actual bill minus the two advance payments) and starts the next 50%. If Dan’s second year comes in at £4,600, January brings a £600 balancing payment plus £2,300 on account.

What if next year will be worse?

Payments on account assume a repeat of last year. If you know income is dropping — injury, fewer contracts, going part-time — you can apply to reduce your payments on account (online or via your return). Be honest: reduce them below what the real bill turns out to be and HMRC charges interest on the shortfall. Over-reduce optimistically and you’ve just moved the shock to next January. This is a judgement call your accountant can help with.

Where CIS changes the picture

Here’s the good news for subbies: CIS deductions are tax collected at source. If contractors deduct 20% all year, much — sometimes all — of your bill is already paid, which can keep the January balance small or produce a refund instead. Many CIS subcontractors never trigger payments on account at all because of the 80%-at-source rule. But mixed income changes it: side jobs off CIS, rental income, or a shift to gross payment status can push your unpaid-at-source tax over the line — and payments on account appear.

How to never be surprised again

• Know your estimated bill all year. SubReady’s Tax page keeps a live estimate built from your actual income, expenses and CIS deducted — and on WhatsApp, “how much tax should I set aside?” gets a straight answer from your own numbers (how the estimate works).
• Set aside weekly, not in January. A fixed slice of every payment into a separate pot beats heroics later.
• File early. The return can go in from 6 April; the money isn’t due until 31 January. Filing early tells you the exact bill months ahead — and starts any refund.
• Diarise 31 July. The summer payment is the one people forget.

Payments on account: quick answers

Is this extra tax?

No — it’s the same tax, collected earlier. Every payment on account is credited against the year it was paid towards; if the advance payments turn out to exceed the final bill, the difference comes back to you.

Do payments on account cover Class 2 NI or student loans?

They cover Income Tax and Class 4 NI. Other charges — student loan deductions, for instance — are settled with the January balancing payment, which is one reason the final bill rarely equals exactly twice the July payment.

What if I genuinely can’t pay?

Don’t ignore it — HMRC’s Time to Pay arrangements let many self-employed people spread a bill in instalments, and engaging early keeps interest the only cost. Your accountant can help you set it up.

My first bill was under £1,000 — am I safe forever?

Only until a bigger year. Cross the line once and the advance-payment cycle starts — which is why a growing subbie should watch the estimate, not the rear-view mirror.

Tax you saw coming is just a bill. Keep the books live, know the number early, and January is boring — exactly how it should be. Start your free trial.