If you earn income outside of the Pay As You Earn system, such as through self-employment, rental property, or dividends, you may be required to submit your tax information via Self Assessment. One element of this process that catches many individuals by surprise is the requirement to make advance contributions towards the following year’s tax bill. These contributions are called payments on account.
Payments on account are advance tax payments based on the amount of tax you owed in the previous tax year. They are designed to help taxpayers stay on top of their obligations and spread the cost of their tax liabilities over the year. Instead of waiting until the next January to pay everything in one go, you pay in two installments: one by 31 January and the second by 31 July.
These payments cover income tax and Class 4 National Insurance for those who are self-employed. They do not typically include capital gains tax or student loan repayments, which must be paid separately once the full return is filed.
Why Does HMRC Require Advance Tax Payments?
The idea behind payments on account is to prevent people from falling into debt with HMRC. By asking for half the estimated tax bill in January and the other half in July, HMRC helps spread the financial burden across the year. This makes it easier for individuals with fluctuating or untaxed income to manage their finances and avoid surprise tax bills.
If you submit your Self Assessment tax return and your tax bill exceeds £1,000 and less than 80 percent of your income tax was collected at source, you are likely to be required to make these advance payments. The figure HMRC uses to calculate each payment is based on your prior year’s bill, so if you owed £8,000 last year, you’ll be expected to pay £4,000 in January and another £4,000 in July.
When Is the Second Payment Due?
The second payment on account is due by midnight on 31 July. This is a critical date for individuals who fall under Self Assessment, but it’s also one that’s commonly overlooked. By mid-summer, most people are no longer thinking about their taxes. The busy financial season around the January deadline has passed, and people are often focused on holidays or seasonal spending instead.
However, failing to meet the 31 July deadline can result in daily interest charges. Although the payment is based on an estimate, HMRC treats the deadline seriously. Delaying payment will not only increase your costs through interest but could also lead to late payment penalties if the delay continues.
How Are Payments on Account Calculated?
Payments on account are calculated as 50 percent of your previous year’s income tax and Class 4 National Insurance bill. This means the payments are estimates rather than exact figures. When you eventually file your next tax return, HMRC will compare the actual bill to what you’ve paid in advance.
For example, if your tax bill for 2023-24 was £10,000, then for the 2024-25 tax year, you will need to pay £5,000 by 31 January 2025 and another £5,000 by 31 July 2025. Then, when you submit your 2024-25 return in January 2026, HMRC will work out if you’ve overpaid or underpaid.
If you have underpaid, you’ll need to pay the difference by 31 January 2026. If you’ve overpaid, HMRC will typically issue a refund or credit the excess toward future tax liabilities.
Who Needs to Make a Second Payment on Account?
Not everyone under Self Assessment needs to make payments on account. You are usually required to do so only if:
- Your Self Assessment tax bill was more than £1,000 in the previous year
- Less than 80 percent of your total tax liability was already paid through PAYE or other withholding mechanisms
For example, if you are employed and earned £50,000 in salary with the correct tax deducted through PAYE, and you had a side hustle that brought in another £5,000 in untaxed earnings, you might only owe a small amount via Self Assessment. If your total tax bill under Self Assessment is under £1,000 or the majority of your tax has been paid at source, you won’t need to make payments on account.
However, if you’re fully self-employed or generate most of your income through sources that aren’t taxed at the point of payment, you will most likely have to pay in advance via the payment on account system.
Common Scenarios Requiring a Second Payment
Several common income types typically result in a second payment on account being due. These include:
- Sole traders and freelancers who earn most of their income without PAYE deductions
- Landlords with rental income from one or more properties
- Investors earning significant dividend or interest income
- Company directors who pay themselves via dividends instead of a salary
- Individuals with multiple income streams, including foreign income
Anyone in these situations should be aware that their first payment due in January is not their only obligation. By the end of July, they must be ready to make the second installment unless they are eligible to reduce or cancel the payment due to lower income.
How to Make the Second Payment
There are multiple ways to make the second payment on account:
- Online through your personal tax account on the official government website
- By using bank transfer, debit card, or direct debit
- Through tax software that links directly to HMRC systems
- Via post using a cheque, although this method is slower and riskier
Whichever method you use, ensure you allow enough time for the payment to clear by 31 July. Payments made late due to banking delays or postal issues can still incur interest charges.
Can You Reduce Your Second Payment?
If your income has dropped in the current tax year, you may be eligible to reduce your second payment on account. This can help free up cash and avoid overpaying tax that will only be refunded months later.
To reduce your payment, you must inform HMRC either through your tax software or directly through your online account. You can also submit a paper form. When reducing payments on account, you should be conservative in your estimates. If HMRC believes the reduction was made without reasonable cause, they may charge interest on the shortfall and issue a penalty.
This is particularly important in years when your business profits fall, or you experience a period of unemployment. Document your estimated earnings accurately and be prepared to justify the reduction if necessary.
What Happens If You Don’t Pay?
If the second payment on account is not made by the 31 July deadline, HMRC will begin charging interest from 1 August onward. The interest rate is subject to change and reflects the base rate plus a margin. The longer the payment is outstanding, the more interest accumulates.
In some cases, additional penalties can apply. While the interest is automatic, penalties for non-payment typically apply only when a significant delay occurs, such as if the payment remains unpaid for more than 30 days.
If you are genuinely unable to make the payment, it’s advisable to contact HMRC as early as possible. You may be eligible for a Time to Pay arrangement, which allows you to spread the cost over several months. While interest is still charged, this can prevent penalties and demonstrate your intention to stay compliant.
Planning Ahead for July and January
Because of the two key tax dates—31 January and 31 July—individuals with untaxed income must develop good financial habits to avoid being caught out. The January payment includes both the balance of any unpaid tax and the first installment for the following year. Then in July, the second half of that estimated tax is due.
Setting aside a percentage of your monthly income into a separate savings account designated for tax is a wise strategy. Many accountants recommend putting aside between 25 to 30 percent of all untaxed income. This figure helps cover not just income tax but also Class 4 National Insurance contributions and potential student loan repayments. By consistently saving and tracking your earnings throughout the year, you reduce the likelihood of facing shortfalls at critical times.
Why Bookkeeping and Forecasting Matter
Accurate bookkeeping is vital when dealing with payments on account. Your estimates must reflect reality as closely as possible, particularly if you intend to reduce the amount due in July. Whether you’re self-employed, a landlord, or a side earner, staying on top of your finances gives you a clearer picture of how much to set aside for tax.
Using software or an accountant can help automate this process. These tools not only track your income and allowable expenses but also provide real-time forecasts of your likely tax liability. This allows you to make informed decisions about when and how to reduce your payments and ensures you remain compliant with HMRC regulations.
Understanding Why You Might Need to Reduce Your Payment
For those earning income outside of Pay As You Earn systems, advance tax payments known as payments on account are often required. These are based on the assumption that your income remains stable or increases year over year. But in reality, earnings can fluctuate significantly. Whether due to a drop in freelance work, the sale of a property not materialising, or market changes affecting investment income, many people find themselves facing a payment on account that no longer reflects their actual liability.
The ability to reduce your second payment on account is an important safeguard. It allows taxpayers to ensure their advance payments remain accurate and avoids the unnecessary stress of overpaying. But it’s a step that should be taken with careful consideration and an understanding of how HMRC responds to underpayments.
What Qualifies as a Reasonable Reduction?
The key to reducing your second payment is demonstrating that your income for the current tax year will be lower than the one used to calculate your payments. A valid reduction might be supported by:
- A downturn in self-employment profits
- The loss of a major client or contract
- A career break or period of unemployment
- Retirement or a shift to part-time work
- Lower rental income due to vacancies or rent reductions
- Decreased dividend or investment income
- Significant business expenses reducing taxable profit
While these are all valid reasons, it’s essential to base any estimated reduction on real data, not guesswork. Keep updated financial records and calculate your expected profit and tax liability based on year-to-date performance. If your reduction is too optimistic and the actual tax bill ends up being higher, you will owe interest on the underpaid amount, and possibly face penalties if HMRC believes the claim was made carelessly or negligently.
How to Apply for a Reduction in Your Payment on Account
There are several ways to request a reduction. You can:
- Use your online Self Assessment account to reduce your payments
- Submit a paper SA303 form to HMRC
- In some cases, request the change through accounting software if it connects directly to HMRC
When applying, you will be asked to provide your new estimated tax bill. The system will then automatically recalculate the payment on account figures for both January and July (if both are still outstanding). If you’ve already paid the first installment, it won’t be refunded immediately, but the second installment will be reduced accordingly, and any overpayment will be reflected when your tax return is submitted.
Estimating Your New Tax Liability
Accurate forecasting is at the heart of this process. You’ll need to assess your total income for the current tax year, deduct all allowable expenses, and calculate the tax due. Factors to include:
- Business income and expenses if self-employed
- Salary income taxed through PAYE
- Rental income and associated costs
- Dividends and savings interest
- Pension contributions and allowable deductions
Once your taxable income is clear, apply the appropriate tax bands and rates for the current tax year. Don’t forget to factor in personal allowances, Class 2 and Class 4 National Insurance if you’re self-employed, and any student loan repayments based on your income threshold.
Many individuals use spreadsheets or accounting tools to maintain monthly records. This way, even if income is irregular, you have a clear overview by mid-year to base your decision on reducing the second payment.
What Happens If You Reduce Too Much?
Reducing your payment too aggressively can lead to underpayment. In this case, when you submit your tax return the following January, HMRC will calculate how much more you owe. If your final tax bill is higher than your payments on account, the difference must be paid by 31 January alongside your first installment for the next year.
Interest is charged from the original due date on any shortfall between what should have been paid and what was actually paid. While interest rates are not usually excessive, they can still add up, particularly on large tax liabilities.
In extreme cases, if HMRC determines that you had no reasonable basis for reducing your payment and it appears the move was made to deliberately delay paying tax, they may issue a penalty for incorrect Self Assessment conduct. These penalties vary in severity depending on the level of carelessness or intent.
What If You Overpay?
On the other end of the spectrum, some taxpayers err on the side of caution and pay more than they need to. If your second payment on account ends up being higher than your final liability, HMRC will issue a refund after you file your tax return.
This refund can take a few weeks to process, especially during the busy filing season in January. It will typically be paid directly into your bank account if your details are on file, or sent by cheque otherwise.
While overpaying doesn’t carry a financial penalty, it does mean your cash is tied up with HMRC instead of earning interest or being available for other expenses. For this reason, regular forecasting and careful monitoring of income are worthwhile.
When Reductions Are Most Common
There are several typical life or business events that often trigger a reduction request:
First year of retirement
When an individual retires after a career of regular income, their following year’s tax bill may drop sharply due to reduced earnings, triggering the need for a lower second payment.
Seasonal businesses
For those in tourism or event-based industries, income may fluctuate year to year depending on contracts, demand, and other economic factors. A quiet season can significantly reduce expected earnings.
Economic downturns
Recessions or industry-specific slowdowns can affect contract availability, property occupancy rates, or dividends. In such cases, it’s wise to review estimated tax obligations.
Career changes
Switching from self-employment to employment under PAYE reduces the need for Self Assessment payments. If most tax is now deducted at source, a payment on account may no longer be necessary.
Parental leave or illness
Extended time away from work due to family or medical reasons reduces income and may justify a smaller tax bill. This scenario should be properly documented in your forecast.
Filing Early to Avoid Overpayment
One effective strategy to avoid making an unnecessary second payment on account is to file your Self Assessment tax return early, before 31 July. If you can complete your return before the second installment is due, you’ll know your exact tax bill for the year and whether the second payment is still needed.
In some cases, your final bill may show that the first payment on account already covered your full liability. If so, you won’t need to make a second payment. Filing early has the added benefit of providing clarity, removing guesswork, and allowing time to resolve any unexpected underpayments.
However, early filing only helps if you have full income data by that time. If your business accounting period aligns with the tax year ending 5 April, and your records are complete by June, this can be a realistic and advantageous approach.
Keeping HMRC Informed
If your financial situation changes mid-year and you need to adjust your payment, it’s better to act sooner than later. While HMRC does allow reductions, they expect that changes are based on reasonable assumptions backed by real figures.
It is important to maintain transparency. If you made a reduction but then experienced a sudden income boost later in the year, consider reversing your earlier adjustment or setting aside funds to cover the potential shortfall.
HMRC’s systems also send reminders and payment notifications based on original figures. If your second payment has been reduced and approved, these reminders won’t override the new calculation—but if you’ve reduced it manually, double-check that the updated amount appears in your account summary.
Setting Up a Budget for Variable Tax Bills
The best way to manage fluctuating tax payments is to maintain a dynamic budgeting system. Whether you’re a landlord, freelancer, or small business owner, it pays to review your earnings monthly or quarterly and adjust your tax forecast accordingly.
Here’s a simple approach:
- Track your gross income monthly
- Record allowable business expenses
- Calculate taxable profit
- Apply current tax bands and thresholds
- Update your running total of expected liability
- Compare against what’s already been paid
This approach creates a live estimate that becomes more accurate as the year progresses. If by June or July your tax forecast shows a lower total than last year, you’ll be in a strong position to justify a reduced second payment on account.
Role of Proactive Tax Planning
Tax planning isn’t just about submitting returns on time—it’s about anticipating liabilities and adjusting cash flow accordingly. By treating your tax obligations like a fixed monthly expense, you can smooth out the financial impact of large payment deadlines.
Here are some proactive steps to take:
- Use separate savings accounts for tax funds
- Adjust your standing orders based on real-time earnings
- Review your position each quarter, not just at year-end
- Make a habit of checking your HMRC account regularly
Good planning also involves preparing for the worst-case scenario. If your second payment turns out to be correct after all, but you didn’t budget enough, you may find yourself scrambling to cover the shortfall. Regular forecasting and conservative estimates help reduce this risk.
Understanding What Happens If You Miss the 31 July Deadline
The second payment on account deadline of 31 July is a fixed date. Missing it results in immediate consequences. Unlike some billing systems that offer grace periods, HMRC charges interest on late payments from the day after the due date. This means that if your second payment isn’t received by midnight on 31 July, interest begins to accrue starting 1 August.
While the interest rate may fluctuate depending on economic conditions, it is set above the Bank of England base rate to encourage timely compliance. The daily nature of this interest can quickly add up, especially on large amounts due. There’s also the potential for surcharges if the debt remains unpaid for an extended period.
Paying late can also cause issues with your overall tax account. Unpaid second payments affect your starting balance for the following tax year and may complicate the calculation of the next year’s payment on account amounts.
How to Pay Late and Minimise Further Charges
If you’ve missed the deadline, it’s important to pay what you owe as soon as possible. The longer you wait, the more interest you accumulate. HMRC allows various methods for payment, including bank transfers, direct debit, debit cards, and postal cheques, although electronic payments are processed more quickly and update your account faster.
While paying late is not ideal, partial payments are still better than none. Paying as much as you can, even if you cannot cover the full amount, will reduce the interest charged. HMRC will apply any funds received against your oldest debts first, so prioritising timely payments on overdue amounts helps prevent the growth of the balance.
If your financial situation makes it difficult to pay the full amount quickly, HMRC does offer payment plans through their Time to Pay service. This is a formal arrangement that allows you to spread your outstanding tax across several months. However, interest will still apply for the duration of the payment plan.
When Do Surcharges and Penalties Apply?
In most cases, a simple late payment only results in interest. However, if the amount remains unpaid for 30 days or longer, additional surcharges may be applied. These penalties are percentage-based and increase the longer the debt remains unresolved.
Here’s how these penalties typically escalate:
- 30 days late: 5% of the unpaid tax
- 6 months late: An additional 5%
- 12 months late: Another 5%
These surcharges are separate from the accruing interest, meaning the cost of late payment can compound significantly over time. This makes it essential to monitor your tax deadlines closely and act quickly if a payment is missed.
In some cases, you may be able to appeal a surcharge. HMRC accepts appeals where you can show a reasonable excuse for not paying on time. Examples might include serious illness, a natural disaster, or administrative errors beyond your control. However, you must provide evidence and appeal promptly after the penalty is issued.
How to Check If You Are Due a Refund After Payment
Sometimes, especially if your income decreased compared to the previous year, you might have overpaid your tax. After the second payment on account is made in July, and your tax return is submitted in January, it may become apparent that your payments exceeded your final tax liability.
If this is the case, HMRC will issue a refund after processing your return. Refunds are typically paid directly into your bank account if details are already stored on your Self Assessment profile. Otherwise, a cheque will be issued and posted to your registered address.
It is important to ensure that your banking and personal contact information is up to date with HMRC. Delays often occur due to mismatched or missing bank details.
To check whether you’re owed a refund:
- Log into your online Self Assessment account
- Review your calculation summary after filing your return
- Look for a credit balance or note of repayment due
Once your return is filed and a refund is confirmed, HMRC usually processes it within two to four weeks. During peak filing season in January, this can take longer.
Steps to Claim a Refund Efficiently
If your account shows a credit and no automatic refund is initiated, you can manually request repayment through your online account. This option will appear on your Self Assessment dashboard if funds are available for repayment.
Select the repayment option, enter or confirm your bank details, and submit the request. In many cases, the system will issue a refund within a few working days.
If you used paper forms or tax software and don’t see a refund automatically initiated, you may need to contact HMRC directly or submit a formal written request. Be sure to include your taxpayer reference number, your name, the amount in question, and your bank details.
If your overpayment is less than your next year’s payment on account, HMRC may automatically offset the refund against your upcoming obligations unless instructed otherwise. This is something to monitor if you’re trying to reclaim funds for business use or personal budgeting.
Preparing for the Next Tax Year
Once the July deadline has passed and payments are in order, it’s time to begin thinking about your next tax cycle. Payments on account are estimated based on the most recently filed Self Assessment return. So if your income was unusually high or low in the last year, your future payments could be misaligned with reality.
To avoid surprises, early forecasting is essential. Aim to keep monthly or quarterly records of all income and expenses. This will help you project your future liability and give you a clearer idea of whether you might want to request a reduction in the next payment on account. Regularly reviewing your financial position also helps identify opportunities for allowable deductions, capital investment relief, or timing shifts that could benefit your final tax position.
Changes in Circumstances That Could Affect Your Tax Bill
Several common life events can have a significant impact on your taxable income and should prompt a mid-year tax review. These include:
Becoming Self-Employed
If you recently left employment to become self-employed, your first year of trading may generate a different level of income than expected. Make sure to update your forecasts and consider the effects on your payments on account.
Selling Assets
Disposing of property, shares, or other capital assets may trigger capital gains tax. If the timing of the sale falls in a different tax year than planned, your expected liability may shift.
Starting a Pension
Drawing income from a private pension introduces new taxable earnings. These may be partially taxed at source, but the residual amount may increase your Self Assessment obligation.
Changing Business Structures
If you moved from sole trader to limited company status or joined a partnership, this change affects your income reporting. Make sure your payments reflect your current position.
Receiving Investment or Rental Income
Interest, dividends, and rent can fluctuate year to year. If these sources of income rise or fall sharply, your estimated liability may be higher or lower than assumed.
Keeping Your HMRC Records Accurate
Accuracy is key when it comes to managing Self Assessment. Always ensure that your address, phone number, bank details, and email address are current. Failing to update your contact information may result in missed reminders or delays in communication.
Also, double-check that your National Insurance number and Unique Taxpayer Reference (UTR) are correctly entered on all documents and correspondence. This helps avoid errors in processing returns, issuing refunds, or calculating payment on account figures.
If you’re submitting tax returns manually, retain postal receipts and copies of all forms sent. For electronic submissions, download confirmation emails or keep screenshots of submission receipts.
The Benefits of Early Filing and Forecasting
Filing your Self Assessment return early, before the 31 January deadline, offers several advantages:
- You’ll find out your final liability and avoid overpayment
- You can plan ahead for payments due in January and July
- Any refund owed will be processed sooner
- You’ll have more time to correct errors or seek support
Early filing also improves your ability to make informed business decisions. If your projected profit is higher than expected, you might allocate more toward savings or investments. If it’s lower, you can request reductions in payments on account or adjust your budget accordingly.
Even if you wait to file until later in the year, having your financial data ready by July helps determine whether your second payment is appropriate. Using spreadsheets or bookkeeping software to maintain real-time financial tracking makes this easier.
Dealing with Unexpected Bills or Corrections
Sometimes, errors occur on your tax return that lead to unexpected liabilities. HMRC may issue a correction notice, called an amended return calculation. If this results in additional tax owed, you’ll be given a deadline for payment.
It’s crucial to read these notices carefully and verify whether the correction is accurate. If you believe an error has been made, you can appeal or request a review. However, you must act quickly—usually within 30 days of receiving the notice.
If the correction is accurate but the amount due is large, consider contacting HMRC to negotiate a payment plan. Being proactive is always better than ignoring the issue, which could result in enforcement action or increased penalties.
Maintaining Peace of Mind Throughout the Tax Year
Dealing with taxes twice a year, especially when operating outside of a traditional employment structure, can feel burdensome. But by staying organised, forecasting your income accurately, and responding quickly to changes or deadlines, you can avoid stress and reduce financial pressure.
Here are a few final tips to maintain control:
- Keep detailed monthly income and expense records
- Revisit your payment on account status each quarter
- Respond promptly to all HMRC notices or requests
- Set calendar reminders for 31 January and 31 July
- Review your tax position in June and December each year
The tax system is designed to ensure fairness and regularity, but it does rely on accurate self-reporting and timely payments. By managing your obligations consistently throughout the year, you avoid last-minute surprises and keep your financial house in order.
Conclusion
Staying on top of your tax obligations when earning income outside of PAYE requires careful planning, awareness of key dates, and a clear understanding of how HMRC’s payment on account system works. The two advance payments due by 31 January and 31 July can catch many taxpayers off guard, especially when the second installment arrives during the quieter mid-year period.
This series explored the importance of these payments, how they are calculated, and the implications of missing deadlines. Understanding when and why you’re required to make payments on account helps avoid costly surprises, such as late payment interest and surcharges. We also examined what happens if you overpay, how to claim a refund, and how to request reductions if your income has dropped.
Beyond just meeting your current obligations, effective tax management means looking ahead. Forecasting income, updating HMRC when your circumstances change, and maintaining accurate financial records throughout the year can help ensure that you pay the right amount — no more, no less. Early filing, regular reviews, and good bookkeeping provide peace of mind and reduce the stress that often comes with tax season.
Whether you’re newly self-employed, managing multiple income streams, or simply want to be better prepared, the key takeaway is this: treat tax as an ongoing responsibility, not a once-a-year panic. By integrating tax awareness into your regular financial habits, you’ll not only meet your deadlines but also protect your business, avoid penalties, and keep more of what you earn.