The July echo: budgeting for payments on account after the January return
Photo: UK self-employed accountant planning tax payments calendar and receipts on desk, via facts.net
For many self-assessment taxpayers, the January filing deadline is treated as the end of the tax story. The return is submitted, the bill is paid, and the matter is closed. Then July arrives with a second demand that can feel like an administrative echo. In reality, the July payment is usually not an error. It is the second half of an advance payment towards the current year’s tax, and understanding it is the key to removing the annual surprise.
What a payment on account actually is
A payment on account is an advance payment towards the next year’s Self Assessment liability. It is not a separate tax. HMRC asks for it where the previous year’s bill was more than £1,000 and less than 80% of the tax was collected at source, for example through PAYE. The payments are normally made in two instalments: the first on 31 January and the second on 31 July.
Each instalment is usually half of the previous year’s relevant tax liability. That liability generally covers income tax and Class 4 National Insurance for the self-employed. It does not normally include capital gains tax, student loan repayments or Class 2 National Insurance. This distinction matters because a taxpayer may see a large overall bill but a smaller payment on account if much of the bill consists of items outside the payment-on-account calculation.
The January demand is often two bills in one
The confusion arises because the 31 January payment date can carry two separate obligations. The first is the balancing payment for the return just filed: the difference between the tax actually due for that year and the payments on account already made. The second is the first payment on account for the following year.
That is why January can feel disproportionately expensive. A taxpayer may have budgeted for the final bill but not for the advance payment that sits alongside it. The July instalment then follows, completing the advance payments for the new year. Once the pattern is understood, the annual cash requirement becomes easier to forecast.
A worked example
Suppose your 2025/26 return, due on 31 January 2027, shows a tax bill of £6,000. During 2025/26 you had already paid £2,500 in payments on account. On 31 January 2027, you therefore owe a balancing payment of £3,500. Because the 2025/26 liability is above £1,000 and the relevant conditions are met, HMRC also asks for a first payment on account for 2026/27. That instalment is half of £6,000, so £3,000.
The total due on 31 January 2027 is therefore £6,500: £3,500 for the old year and £3,000 towards the new one. A second payment on account of £3,000 follows on 31 July 2027. The £6,500 figure can be a shock if the taxpayer has focused only on the £3,500 balancing payment. A budget that anticipates both elements avoids that shock.
When it is legitimate to reduce an instalment
A payment on account is based on the previous year’s liability, so it can be too high if income has fallen. A taxpayer who expects a lower tax bill because of reduced profits, retirement, a loss, a change in employment or a smaller dividend can apply to reduce the payments. The reduction should be based on a realistic estimate of the current year’s liability, not on a hope that cash flow will improve.
If the reduction is too large and the final bill is higher than estimated, HMRC can charge interest and may impose a penalty. The safer approach is to keep the calculation and supporting evidence, review the estimate as the year progresses, and amend it if circumstances change. Reducing an instalment is a planning tool, not a way to postpone tax that is genuinely due.
A budgeting calendar that removes the surprise
A practical routine is to divide the expected annual tax liability into monthly amounts and set them aside in a separate savings account. The calendar should include the main pressure points: 31 July for the second payment on account, 5 October for any new registration, and 31 January for the return, balancing payment and first payment on account. After each July payment, review the estimate for the current year and adjust the monthly amount if profits have moved.
It also helps to distinguish between the tax already incurred and the tax being paid in advance. For the 2026/27 year, a sole trader can track profit quarterly and estimate the eventual liability. By the time January 2028 arrives, the figure should be familiar rather than revelatory. The July payment then becomes a scheduled item, not an unexplained sequel.
If the January figure is already unmanageable
Where the total due cannot be paid in full, contacting HMRC before the deadline is usually better than waiting. A payment plan can spread the liability, although interest may continue to accrue. Filing the return on time remains important even if payment is arranged separately, because late filing penalties are separate from late payment charges.
The central point is that payments on account are designed to align tax payments with the year in which the income is earned. They can feel like a repeat demand, but they are better understood as a cash-flow pattern. Once the pattern is mapped, January and July become two predictable dates in a twelve-month plan rather than two unrelated financial shocks.
