HMRC Payment on Account Explained: What It Is and How to Plan for It

What is a payment on account?

A payment on account is an advance payment towards your next tax bill. HMRC requires them if your self assessment tax bill is over £1,000 and less than 80% of your tax was collected at source (for example, through PAYE). In practice, most sole traders and freelancers with tax bills over £1,000 will need to make payments on account.

How they are calculated

Each payment on account is half of the previous year's tax bill. If your 2025/26 tax bill is £8,000, HMRC will require two payments on account towards your 2026/27 bill: £4,000 due on 31 January 2027 and £4,000 due on 31 July 2027.

This means that on 31 January 2027, you pay both the balance of your 2025/26 tax bill AND the first payment on account for 2026/27. For many sole traders, this creates a painful cash spike that they did not see coming.

The first year shock

The first year you hit the threshold is the worst. You owe the full tax bill for the year just gone PLUS the first advance payment for the year ahead. Using the example above, if your 2025/26 bill is £8,000 and you had no payments on account from the prior year, you would owe £12,000 on 31 January 2027: the £8,000 bill plus a £4,000 payment on account.

How to plan for it

The simplest approach is to set aside money for tax monthly. If you expect to earn £50,000 profit, estimate your tax liability (income tax plus NI) and divide by 12. Transfer that amount into a separate savings account every month. When the deadline arrives, the money is already there.

How CFO Pal helps

CFO Pal forecasts your cashflow including known tax payment dates. It shows the cash leaving your account on 31 January and 31 July so you can see the impact months in advance. If the forecast shows your balance dropping dangerously after a payment on account date, you get an early warning to act.