If you are self-employed, a landlord, or a company director with personal tax to settle, and your January tax bill came with a second instalment due on 31 July, you may have unknowingly been pulled into a system called Payments on Account.
For many people, the July payment lands as a complete surprise. They filed their return in January. They paid what HMRC asked them to pay. And now, six months later, there is another bill.
The reality is that many taxpayers accidentally fall into this trap simply because nobody has properly explained the rules to them.
What Are Payments on Account?
Payments on Account are HMRC’s way of collecting tax in advance.
Instead of waiting until the end of a tax year to ask for the full bill, HMRC asks you to pay half of next year’s tax in two installments; based on what you owed last year.
Think of it like this:
HMRC does not want to wait 12 months to start collecting your tax. So they ask for it in advance, in two halves.
The two payments fall on:
- 31 January: alongside your balancing payment for the previous tax year, and
- 31 July: the second instalment, with nothing else due
Each payment is normally 50% of your previous year’s tax liability.
When you eventually file your return for the year, HMRC reconciles the difference. If the two Payments on Account covered everything, brilliant. If you owe more, you settle the balance on the following 31 January. If you owe less, you receive a refund.
Who Has to Make Payments on Account?
You will be asked to make Payments on Account if both of these are true:
- Your Self Assessment tax bill is more than £1,000 and
- Less than 80% of your tax was collected at source (for example through PAYE)
For most self-employed people, landlords, and directors with significant dividend income, both of these conditions will apply.
What Is Included (And What Is Not)
It is worth being clear about what HMRC actually asks for in advance, because several common items are excluded.
Included:
- Income tax on your self-employment, rental, dividend or other income
- Class 4 National Insurance
Not included:
- Capital Gains Tax (settled in your balancing payment on 31 January)
- Class 2 National Insurance (and for most self-employed people above the small profits threshold, Class 2 is no longer compulsory since April 2024)
- Student loan repayments
This matters, because if you have had a one-off capital gain or a big year of dividends, the math is not always as straightforward as “half of last year’s bill”.
Worked Example
Let us make this practical.
Imagine your 2024/25 Self Assessment tax bill came to £6,000.
- 31 January 2026: You pay £6,000 balancing payment for 2024/25 plus a £3,000 first Payment on Account for 2025/26 = £9,000
- 31 July 2026: You pay your £3,000 second Payment on Account for 2025/26
- 31 January 2027: You settle any balance once your 2025/26 return is filed
The total tax over 12 months has not changed. But the cash flow has.
Why First-Year Self-Employed Taxpayers Get a Nasty Shock
This is where Payments on Account cause the most pain.
Imagine you went self-employed in May 2024 and had a strong first year. Your 2024/25 tax bill comes to £4,000. Here is what happens:
- £4,000 balancing payment for 2024/25
- £2,000 first Payment on Account for 2025/26
- £6,000 due on 31 January 2026,in one go
Then on 31 July 2026, another £2,000 lands.
In six months, you have paid £8,000 in tax, twice the figure you mentally prepared for.
This is the single most common reason new business owners come to us mid-panic. The maths is fair. The communication is not.
If you are in your first year of self-employment, the rule of thumb we give clients is to set aside roughly 30% of your profits as you go, not the 20–25% most people assume from looking at headline tax rates.
Can You Reduce Your Payments on Account?
Yes, in many cases. Good planning makes a real difference.
You can ask HMRC to reduce your Payments on Account if you have good reason to believe your tax bill will be lower this year than last. Common, legitimate reasons include:
- You have stepped back from self-employment or moved to PAYE
- Your business has slowed unexpectedly
- A one-off windfall inflated last year’s figure
- Illness, parental leave, or reduced trading hours
You can apply online through your HMRC account, or by filing form SA303. Your accountant can do this on your behalf in minutes.
However, and this is where many people come unstuck, HMRC is not gentle if you reduce too far.
If your actual bill ends up higher than the reduced payments you made, HMRC charges interest on the shortfall, backdated to the original 31 January and 31 July deadlines. So reducing is not a free option. It is a forecast you are committing to.
Common Mistakes Taxpayers Make
1. Forgetting the July Payment Exists
The 31 January payment gets all the attention. The 31 July payment often gets overlooked entirely, particularly in the second half of the year when tax is the last thing on anyone’s mind.
2. Spending the Money
Without proper bookkeeping, many self-employed people simply do not know how much tax they are accumulating. By July, the money is gone.
3. Reducing Payments Too Aggressively
A small reduction based on a genuine drop in income is sensible. A large reduction made out of cash flow panic almost always backfires with interest charges later.
4. Ignoring HMRC Letters
Once a deadline is missed, the situation escalates quickly. Speaking to HMRC early, or having your accountant do it for you, always produces better outcomes than waiting.
What If You Cannot Pay by 31 July?
If you genuinely cannot pay your 31 July bill, the worst thing you can do is ignore it.
Interest starts accruing from 1 August at HMRC’s prevailing late payment rate, which is linked to the Bank of England base rate. (The current HMRC late payment interest rate changes regularly, please check gov.uk for the rate at the time of reading.)
Late payment penalties are separate from interest, and apply if the tax remains unpaid for an extended period.
Time to Pay is HMRC’s payment plan. If you owe under £30,000, you have filed all your returns, and the debt is less than 60 days old, you can usually set up a Time to Pay arrangement online without speaking to anyone. The bill is then spread over up to 12 months. Interest still accrues, but you avoid the worst of the penalties.
For larger amounts or more complex situations, your accountant can negotiate directly with HMRC on your behalf.
The single best piece of advice we give clients: if July is going to be tight, tell us in May or June; not on 30 July. The options narrow fast as the deadline approaches.
The Key Message
Self Assessment is not a single bill once a year. For many self-employed people, landlords and directors, it is a three-payment cycle:
- The balancing payment on 31 January
- The first Payment on Account on 31 January
- The second Payment on Account on 31 July
The good news is that with proactive tax planning, regular bookkeeping, and a clear forecast of next year’s bill, Payments on Account stop being a surprise. They become something you can plan for, set aside for, and pay without losing sleep.
Need Help With Your July 2026 Payment?
At Arcus Accountants & Business Advisers, we help business owners and individuals understand their numbers in plain English.
We work proactively with our clients to:
- forecast next year’s tax bill at year-end,
- tell you exactly what to set aside each month,
- flag both Payment on Account deadlines well in advance,
- file an SA303 to reduce payments where circumstances genuinely justify it,
- and negotiate Time to Pay with HMRC if the cash flow does not stretch.
If your July 2026 payment is on the way and you would rather not face it alone, get in touch. We will talk you through what you owe, whether it can be reduced, and what to do if the money simply is not there.
