One of the most common sources of confusion for self-employed people and business owners in the UK is not the tax itself. It is the timing. Many people know roughly what they owe HMRC but are caught off guard by when the payments are actually due, why the January bill is so much larger than expected, and what happens when payments arrive late.
This article explains the UK payment system for Self Assessment taxpayers clearly and in plain terms: what a payment on account is, what a balancing payment is, why you can owe both at the same time, and what HMRC charges when payments are late.
The Basic Idea: Tax Is Paid in Instalments
For most employees, income tax is deducted from their wages every month through a system called PAYE (Pay As You Earn). The employer handles this automatically, and the tax arrives at HMRC throughout the year as it is earned.
For self-employed people, no one deducts tax at source. HMRC addresses this by requiring taxpayers to make advance payments towards the current year’s expected tax bill. These are called payments on account. Think of them as deposits made before the final bill is calculated.
There are two payments on account per year. At the end of the year, once the actual tax liability is known, a final adjustment is made. This is called the balancing payment.
What Is a Payment on Account?
A payment on account is an advance payment made towards the current tax year’s income tax liability. HMRC calculates the amount based on what you paid the previous year.
Each payment on account is equal to 50% of the income tax due for the previous tax year, after deducting any tax already collected at source (for example, through PAYE on a part-time employed job, or tax deducted on savings interest). Capital Gains Tax is not included in this calculation. Payments on account cover income tax only.
Formula: how each payment on account is calculated
Each payment on account = 50% x (prior year income tax liability minus tax deducted at source)
Example:
Prior year income tax liability: £10,000
Less: tax deducted at source (PAYE): (£4,000)
Prior year income tax due: £6,000
Each payment on account = £6,000 x 50% = £3,000
Total payments on account for the year: £6,000
There are two payments on account per tax year, each covering half the estimated liability:
First payment on account: 31 January during the tax year.
Second payment on account: 31 July following the start of the tax year.
Both payments on account for a given tax year fall in the same calendar year. For 2025/26, the first payment was due 31 January 2026 and the second is due 31 July 2026.
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2025/26 tax year (return due January 2027):
31 January 2026 – 1st payment on account for 2025/26
31 July 2026 – 2nd payment on account for 2025/26
31 January 2027 – Balancing payment for 2025/26 + 1st payment on account for 2026/27
2026/27 tax year (return due January 2028):
31 January 2027 – 1st payment on account for 2026/27
31 July 2027 – 2nd payment on account for 2026/27
31 January 2028 – Balancing payment for 2026/27 + 1st payment on account for 2027/28
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When Are No Payments on Account Required?
Not every taxpayer in Self Assessment is required to make payments on account. You are exempt if either of the following applied in the previous tax year:
Your income tax liability after deducting tax collected at source was less than £1,000. Or more than 80% of your total income tax liability was collected at source (for example through PAYE).
If you are exempt, you simply pay your full tax liability as a single balancing payment on 31 January following the tax year end.
What Is a Balancing Payment?
Once you file your tax return and your actual tax liability for the year is known, HMRC compares that figure against the payments on account you have already made.
If the payments on account were less than the actual liability, you owe the difference. This shortfall is your balancing payment. If the payments on account were more than the actual liability, HMRC owes you a refund.
The balancing payment (or refund) is settled on 31 January following the end of the tax year. For the 2023/24 tax year, the balancing payment was due on 31 January 2025. For the 2025/26 tax year, the balancing payment is due on 31 January 2027.
The January Problem: Why the January Bill Is So Large
This is where many taxpayers are surprised. On 31 January following a tax year, you do not just pay the balancing payment for the year that has just ended. You also pay the first payment on account for the new tax year that is now in progress.
So on 31 January 2027, a self-employed person with a 2025/26 liability will owe both the balancing payment for 2025/26 (the year that ended in April 2026) and the first payment on account for 2026/27 (the year now in progress). These two amounts land on the exact same date. That is why a single January payment can feel disproportionately large.
On 31 January each year, many taxpayers owe two separate amounts at the same time.
1. Balancing payment for the tax year just ended
2. First payment on account for the tax year now in progress
These are not the same payment. They are two distinct amounts that happen to share a deadline.
Budgeting for one and forgetting the other is one of the most common causes of payment shortfalls.
Worked Example: Nina
The figures below use 2022/23 and 2023/24 as the reference years. Once you understand the steps here, you can apply the same method to any year by substituting the current dates (shown in the reference box above).
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Nina: 2022/23 tax position (prior year)
| Description | Amount |
| Income tax liability | £17,000 |
| Less: tax deducted via PAYE | (£11,000) |
| Income tax due | £6,000 |
Nina: 2023/24 tax position (current year in example)
| Description | Amount |
| Income tax liability | £21,000 |
| Capital Gains Tax (share sale) | £3,800 |
| Total tax liability | £24,800 |
| Less: PAYE deducted | (£13,000) |
| Total tax due | £11,800 |
Step 1: Payments on account for 2023/24 (based on 2022/23 income tax due of £6,000)
Each payment on account = £6,000 x 50% = £3,000
Paid: £3,000 on 31 January 2024, £3,000 on 31 July 2024 = £6,000 total
Step 2: Balancing payment for 2023/24 (due 31 January 2025)
Total tax due 2023/24: £11,800
Less: payments on account paid: (£6,000)
Balancing payment: £5,800
Step 3: First payment on account for 2024/25 (also due 31 January 2025)
Based on 2023/24 income tax due: £21,000 minus £13,000 (PAYE) = £8,000
First payment on account: £8,000 x 50% = £4,000
Note: the Capital Gains Tax of £3,800 is included in the balancing payment calculation
but is excluded from the payments on account calculation. Payments on account cover income tax only.
Total Nina pays on 31 January 2025
| Payment | Amount |
| Balancing payment 2023/24 | £5,800 |
| First payment on account 2024/25 | £4,000 |
| Total | £9,800 |
Interest on Tax Paid Late
If any tax payment arrives after its due date, HMRC charges interest on the overdue amount. This applies to both payments on account and balancing payments. Interest runs from the date the tax was due to the date it is actually paid.
HMRC charges interest at the Bank of England Base Rate plus 2.5%. The Base Rate changes over time, so the exact rate will vary. The worked example below uses 6.5% for illustration purposes. To find the rate that applies to you, check the current HMRC late payment interest rate at gov.uk.
Formula: interest on late tax
Interest = amount overdue x (days late / 365) x interest rate
Example: £4,000 overdue for 49 days at 6.5%:
£4,000 x 49/365 x 6.5% = £35
Important: interest is not a penalty. It is a commercial charge for late payment.
It cannot be reduced through disclosure and does not depend on why the payment was late.
Late Payment Penalties
On top of interest, HMRC also charges separate penalties when a tax payment is significantly overdue. Unlike interest (which starts the day after the due date), penalties are triggered at specific time thresholds.
These penalties apply to the balancing payment and other tax due on a return. Payments on account paid late attract interest but do not attract separate late payment penalties.
Late payment penalty structure
| When overdue | Penalty charged |
| More than 30 days after the payment due date | 5% of the outstanding tax at that point |
| More than 5 months after the first penalty was charged | A further 5% of the tax still outstanding |
| More than 11 months after the first penalty was charged | A further 5% of the tax still outstanding |
A taxpayer who pays their balancing payment very late could face three rounds of 5% charges, producing a combined penalty of up to 15% of the outstanding tax, plus interest for every day the payment is late. HMRC does have the power to reduce penalties in cases where there are special circumstances that prevented payment, but this is at HMRC’s discretion and is not guaranteed.
Worked Example: Tom
Tom’s payment was due on 31 January 2025. The same calculation applies to any late payment: substitute the relevant due date and payment date for the current year to check your own position.
Tom’s balancing payment of £4,000 was due on 31 January 2025. He paid it on 30 September 2025.
Interest:
£4,000 x 242 days / 365 x 6.5% = £172
First penalty: tax still outstanding more than 30 days after 31 January 2025 (after 2 March 2025):
£4,000 x 5% = £200
Second penalty: tax still outstanding more than 5 months after the first penalty (after 2 August 2025).
Tom paid on 30 September 2025, which is after this date:
£4,000 x 5% = £200
Third penalty check: would apply if still outstanding more than 11 months after the first penalty (after 2 February 2026).
Tom paid on 30 September 2025, which is before this date. No third penalty.
Total charges: £172 interest + £200 + £200 = £572
Tom also owes the £4,000 tax itself.
Practical Steps to Avoid Interest and Penalties
Know your January total. When your accountant gives you your tax liability for the year, ask for the full January payment figure, including both the balancing payment and the first payment on account for the new year.
Set money aside monthly. Treat your tax as a monthly obligation, even though HMRC only invoices twice a year. Saving roughly 25 to 30% of your net profit each month prevents a cash crisis in January and July.
Check whether you need payments on account. If your prior year tax bill was under £1,000, or mostly collected at source, you may not need to make them at all.
Pay on time, every time. Interest starts immediately. Even a few days late on a large balancing payment adds up.
If you cannot pay in full, contact HMRC. HMRC has a Time to Pay arrangement that allows taxpayers to spread payments. Getting in touch proactively almost always results in better outcomes than ignoring the deadline.
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