When you are new to being a sole trader, you will quickly become familiar with the 31st January deadline for filing your Self-Assessment tax return and paying your tax bill. However, what often comes as a surprise to many new business owners is a system called Payments on Account.
Finding out you have to pay a large, unexpected tax bill is a very stressful experience. Payments on Account are a common cause of this stress. This guide is written to calmly explain what they are, when they apply, and how they work, so that you can be prepared and avoid any nasty surprises.
What are Payments on Account?
Payments on Account are advance payments towards your next year’s tax bill. They are a way for HMRC to get you to pay your tax bill in two instalments throughout the year, rather than as a single lump sum.
If you are required to make Payments on Account, you will have to make two payments each year:
- The first is due on 31st January.
- The second is due on 31st July.
Each payment is usually 50% of your previous year’s tax bill.
When Do They Apply?
Payments on Account are not required for everyone. You will need to make them if:
- Your last Self-Assessment tax bill was more than £1,000.
- Less than 80% of the tax you owed was collected at source (for example, through the PAYE system if you also have a job).
For most sole traders, if your tax bill is over £1,000, you will need to make Payments on Account.
How It Works in Your First Year
The biggest shock often comes after you file your first tax return. Let’s imagine you started your business in the 2024/25 tax year and your first tax bill is £4,000. This bill is due on 31st January 2026.
Because your tax bill is over £1,000, you will also need to make Payments on Account for the next tax year (2025/26). This means that on 31st January 2026, you will have to pay:
- £4,000 (the balancing payment for your 2024/25 tax bill)
- £2,000 (your first Payment on Account for your 2025/26 tax bill, which is 50% of your £4,000 bill)
This means your total payment to HMRC on 31st January 2026 is £6,000. This is often much more than people expect. You would then have to pay the second Payment on Account of £2,000 on 31st July 2026.
What If Your Income Goes Down?
Payments on Account are based on your previous year’s income. If you know that your income in the current year is going to be lower (e.g. you’re working less, or ceasing becoming self employed and going back into full time employment), you can apply to HMRC to have your Payments on Account reduced. It is important to be realistic when you do this, as if you reduce them by too much, HMRC will charge you interest on the shortfall.
How to Prepare
The key to managing Payments on Account is to be prepared. As a sole trader, it is a good habit to set aside a percentage of every payment you receive from a customer into a separate savings account. A good rule of thumb is to save around 25-30% of your income for tax.
If you do this consistently, you will have the money ready to cover not only your main tax bill but also your Payments on Account, without it causing a major cash flow problem.
When Getting Advice Can Help
Payments on Account can be one of the most confusing and stressful parts of the sole trader tax system. You are not expected to be a tax expert. Getting professional advice can help you plan for your tax bills and manage your cash flow effectively.
If you would like calm, practical support, Penney’s Accountancy works with UK small businesses in and around Farnborough. We can help you understand your tax liabilities, including Payments on Account, and ensure you are always prepared for your tax payments.
Want to Learn More in Your Own Time?
For those who want to build their confidence and understand these topics in more detail, Penney’s Finance School offers an online, self-paced business and finance course. It covers everything from company setup to cash flow, being a sole trader and tax, allowing you to learn at your own pace.
Important information
The information provided in this article is intended as general guidance. UK businesses only and reflects UK tax legislation and HMRC guidance as of February 2026.
Tax rules and business requirements can change, and individual circumstances vary. Before acting on any of the information above, we recommend speaking to a qualified accountant who can provide advice tailored to your specific situation.