Why must I pay half my tax ‘on account’ just because I’m self-employed?

I became self-employed last year and am getting ahead on my 2025/26 tax return – the first one I have filed.

I’m being asked to pay tax for next year ‘on account’. What does this mean and what if my earnings are going to be lower than last year’s – do I just have to overpay?

People on salaries don’t have to pay half their tax in advance, so how is this fair?

Heather Rogers replies: Payments on account were introduced when self-assessment was brought in to streamline the tax affairs of self-employed people in 1996.

‘Why do I have to pay in advance?’ most of my clients asked. Thirty years on, many people still ask me the same question.

In reality, you are not paying in advance, you are still paying in arrears – but the system does confuse taxpayers.

I will explain how payments on account work, what to do if you think they are too high and the pitfalls to avoid.

What are ‘payments on account’?

When you are employed, you pay tax and National Insurance each month through your salary, known as PAYE (Pay As You Earn).

In many cases, if you have no other income other than your salary, at the end of the year all your tax and National Insurance has been paid.

If your tax affairs are more complex this may not be the case and you have to complete a self- assessment tax return.

However, if you are self-employed, in partnership, have rental income or significant income from investments, tax is not usually deducted at source on your income.

Therefore, you pay your tax and National Insurance by 31 January following the end of the tax year.

For the tax year 2025/26 which runs from 6/4/25-5/4/26, the tax and any National Insurance due on the income earned in that period, less allowable expenses and so on, is payable by midnight on 31 January 2027, 10 months after you have earned it.

National Insurance is only payable on self-employed income and certain partnership income.

Additionally, depending on the amount of tax and NI due (the thresholds are explained below) you may also need to make a payment on account towards 2026/27 by the 31 January 2027.

For example, let’s assume that your only income is from your self-employment and your total liability on this income for 2025/26 is £2,000.

By 31 January 2027, along with your tax liability of £2,000 for 2025/26, you will need to make a payment on account of half your 2025/26 liability of £1,000, bringing the total due by 31 January 2027 to £3,000.

The payment on account is not in advance. It may be before the end of the tax year but you have earned 10 months’ more income since 5/4/26.

By midnight on 31 July 2027, nearly four months after the end of the 2026/27 tax year, you need to make a second payment on account of £1,000.

That means when you prepare your 2026/27 tax return, for which the tax/NI is due by 31 January 2028, you have already paid £2,000 towards that liability.

You will only pay any balance (known as a balancing payment), if your income is higher than for 2025/26, or you will receive a refund if it is lower.

You will then pay payments on account in the same manner based on your 2026/27 income for 2027/28.

There are no changes to tax payment dates under Making Tax Digital.

What if your income for 2026/27 is going to be much lower?

Using your personal tax account, you can apply to reduce the payments on account to a level which you believe to be correct, or if you have an accountant you can ask them to make the calculation.

However, beware! If you reduce your payments on account by more than they should have been – in other words, you underestimate your income – then you will be charged interest on the payments you should have made, from the date they should have been made.

So, this can cost you money.

If your income is slightly down on the previous year, then don’t change your payments on account but prepare your tax return before the second payment on account is due in July.

At that point you will have a final figure and can reduce your payments on account if required to the exact amount of tax owed to avoid interest.

It is also a good idea to prepare your return early before the second payment on account is due in July, if you think you have reduced your payments on account by too much, so you can bring them up to date and reduce any interest charged.

What if your income is going to be higher in 2026/27?

You do not have to increase your payments on account. HMRC will calculate them based on your income for the previous year.

If you earn more in the next tax year, just bear in mind your payments on account won’t cover your total tax and NI liability and you will need to put more aside, as you will have a balancing payment to make.

What is the threshold to make payments on account?

You do not need to make payments on account if the amount of tax/NI you owed last year was less than £1,000.

You are also exempt if last year you paid more than 80 per cent of the tax you owed for that tax year via PAYE or by tax having already been deducted, for example some trust income, or certain investment income.

If the latter circumstance applies, then you could have a tax bill which is well in excess of £1,000.

However, no payment on account would be necessary as long as at least 80 per cent of your tax was deducted at source.

What if you paid capital gains tax in the last tax year?

If you had capital gains on which you paid CGT in the previous year, these gains will not be included for the calculation of payment on account for the following year.

Payments on account are for income sources only. They do not include gains made from selling assets, so your payments on account will not include them.

Final dos and don’ts and further info

The payments on account system works well, as it helps to smooth out the tax payments.

However, the first year that you have to pay a payment on account can be a surprise if you are taken unaware, especially if you have had a challenging year following a good year.

Do use the option to reduce your payments on account if your income is lower.

You will have to state the reason you are reducing your payment on account when you do so.

Just bear in mind that interest will be charged on any payments you should have made, so use with care.

What you must not do is incorrectly reduce your payments on account because cash flow is tight. In these circumstances, set up a payment plan with HMRC.

Gov.uk has more information about payments on account here.