“I thought I’d budgeted for my tax bill. So why is HMRC asking for half as much again?”
I hear a version of this every winter. Someone has worked out roughly what they owe for the year, put something aside, and then the January figure arrives bigger than they expected. Nothing has gone wrong. It’s payments on account, and almost nobody explains them properly until the bill turns up.
So here’s the plain-English version, and what you can do about it before 31 January.
What are payments on account?
If you’re self-employed or have other income taxed through Self Assessment, HMRC doesn’t just collect last year’s tax. It also asks for advance payments towards next year’s bill. These are payments on account.
There are two of them, due by midnight on 31 January and 31 July. Each one is normally half of the tax you owed for the previous year, and if you’re self-employed they can include Class 4 National Insurance.
You don’t have to make them if either of these applies:
- the tax you owed last year was under £1,000, or
- more than 80% of last year’s tax was already paid outside Self Assessment, for example through your tax code.
Why the January bill is bigger than you expected
In January you can be paying for two tax years at once. On 31 January 2027, for example, you’d usually pay whatever is still owed for the 2025 to 2026 tax year (the “balancing payment”) plus your first payment on account towards 2026 to 2027.
It hits hardest the first time. If you didn’t make payments on account last year, January means the whole of last year’s bill plus half as much again.
Here’s an illustrative example (not a real client). A sole trader’s tax bill for 2025 to 2026 comes to £4,000, and it’s the first year they’ve needed payments on account. By 31 January 2027 they’d owe the £4,000, plus a first payment on account of £2,000. That’s £6,000 in January, then another £2,000 by 31 July. They’d budgeted for £4,000.
The money isn’t lost. Those payments count towards next year’s bill. But if nobody told you, it feels like the goalposts moved.
What you can do now
Find out the real figure early. Your January bill can’t be confirmed until your tax return is done. Filing well before the deadline gives you weeks to plan rather than days.
Plan for July too. The second payment on account comes round in the summer, often when you’ve stopped thinking about tax. Put it in your diary now.
If your income has dropped, look at reducing them. Payments on account are based on last year. If you expect a smaller bill this year, you can ask HMRC to reduce them, either through your online account (choose “Reduce payments on account”) or by sending form SA303. Be careful, though. If you reduce them too far and your final bill is higher, HMRC charges interest on the shortfall.
Start a tax pot. A separate account where money goes every time you’re paid, and is left alone. A pot doesn’t guarantee the bill is covered: it needs reviewing regularly to check enough is going in, and the right amount depends on your business, so check it with your accountant.
Where this gets handled in the Sunnyside Profit System
Payments on account are a deadline problem on the surface. Underneath, they’re a planning problem: the tax money and the spending money live in the same place, so the bill always feels like a raid on your account.
This is what the Control stage of the Sunnyside Profit System is for. It runs in months two and three of the programme. We set your owner’s pay as a figure on a regular date, set up a tax pot that builds every time you’re paid, and review every regular cost. By the end of it you have your 12-month Profit Plan.
The coaching doesn’t include preparing your tax return. What it does is make sure the money for the bill has been building quietly all year, so January and July are dates in the plan rather than surprises.
Where you could be instead
What we’re aiming for is simple: tax money that isn’t yours to spend, and a January that feels like a date in the diary rather than something you dread. Every business is different, so I won’t promise how it’ll feel for you. But knowing the figure, and having the money already put aside, changes a lot.
Your next step
Just need your tax return sorted before 31 January? Book a free discovery call.
Want help with what’s left after the tax bill, and a tax pot that builds all year? Book a free profit call, or see how the whole journey works on our profit packages page.
This is general information, not advice for your situation. Every business is different, so check with your accountant before acting on it.
