HMRC self assessment: how to pay payment on account before tax return deadline - how paying can reduce bills

• The second payment on account deadline for Self Assessment is July 31
• It’s an advance payment towards your next tax bill, helping to spread the cost
• Making the payment on time can ease cash flow and reduce January stress
• Late payments may incur interest and penalties from HMRC
• You can request to reduce your payment if you expect lower income this year

If you're self-employed or file a Self Assessment tax return, you may be familiar with the term “payment on account”.

With the second instalment deadline falling this week (Thursday, July 31), it's important to understand how this system works — and how making your payment on time could benefit your financial planning and reduce stress when your tax bill is due in full.

A payment on account is an advance payment towards your next Self Assessment tax bill. It’s designed to help spread the cost of your tax over the year rather than paying a lump sum in January.

You make two payments on account every year: the first by January 31, and the second by July 31.

Each payment is usually equal to 50% of your previous year’s tax bill (excluding student loan repayments and Capital Gains Tax). For example, if your last tax bill was £4,000, you’ll likely be asked to make two £2,000 payments on account for the current tax year.

HMRC automatically sets up payments on account if your tax bill is more than £1,000 and less than 80% of your tax was collected at source (e.g. through PAYE).

This often applies to freelancers, sole traders, and other self-employed individuals whose tax isn’t deducted automatically from their income.

If your earnings remain relatively stable, these advance payments can be helpful. But if your income drops from one year to the next, your payments may end up being too high — though you can request to reduce them in that case (more on that later).

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The benefits of making a payment on account

While it may feel counterintuitive to pay tax before you've received the income, there are several benefits to staying on top of your 31 July deadline:

Avoid a big January bill: January can be a tough month financially, especially after the Christmas period. Making your second payment on account in July spreads the tax burden across the year, helping you avoid one large, potentially overwhelming bill at the start of the year.

Stay on HMRC’s good side: Missing the 31 July payment deadline could lead to interest charges and penalties. Making the payment on time helps you avoid unnecessary costs and keeps your tax affairs in good order.

Better cash flow management: If you build your payment on account into your budget throughout the year, it becomes a manageable part of your finances. It also helps you avoid relying on loans or credit cards to pay your tax bill in January.

Reduces the impact of the final balancing payment: In January, you may owe a balancing payment — the difference between your total tax bill and what you’ve already paid on account. If you’ve made both payments on time and your income hasn’t increased significantly, this final amount may be small or even nil.

Protects you against HMRC penalties and interest: HMRC charges interest on late payments and may issue penalties for overdue tax. Making the July payment helps ensure you're not hit with unexpected charges down the line.

How to make a payment on account

Paying HMRC is relatively straightforward. You can make your July 31 payment in several ways:

• Online banking or mobile app: Use HMRC’s bank details and your 11-character payment reference (your Unique Taxpayer Reference followed by ‘K’).
• Debit or corporate credit card: You can pay online via HMRC’s payment portal, although credit cards may incur a fee.
• Direct Debit: If you've set up a Direct Debit previously, HMRC may collect the payment automatically. If not, you can set it up in your HMRC online account.
• Bank Transfer (Faster Payments, BACS, CHAPS): Use your banking app or service to transfer funds directly to HMRC.
• At your bank or building society: You’ll need a payslip from HMRC to pay this way — and this option is only available if you still receive paper statements.

Always check your HMRC online account to confirm the exact amount due and your payment reference.

What if you expect your income to be lower?

If you believe your income will be significantly lower in the current tax year, you can apply to reduce your payments on account. This can be done online via your Self Assessment account or by submitting form SA303.

But be cautious: if you reduce the payments too much and end up owing more, HMRC may charge you interest on the underpaid amount.

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