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Self-Employed· 10 min read · Published 18 Feb 2026

Payments on Account: The Self-Employed Tax Shock and How to Avoid It

First-year freelancers often face a massive January tax bill — their full year's tax liability plus a 50% advance payment for the following year. Here's how Payments on Account work, when they apply, and how much to save every month.

What Are Payments on Account?

Payments on Account (POA) are advance payments toward your next year's Self Assessment tax bill. HMRC requires them because the self-employed pay their tax significantly later than PAYE employees (who pay as they earn). To reduce the gap, HMRC collects two advance payments, each equal to 50% of the prior year's tax liability.

The payments on account include: Income Tax and Class 4 National Insurance. They do not include Capital Gains Tax or student loan repayments, which are always collected via the balancing payment.

When Do Payments on Account Apply?

Payments on Account are required when your Self Assessment tax bill (income tax + Class 4 NI) is £1,000 or more, AND less than 80% of your tax was collected at source (e.g. from PAYE income).

In practice: if you are fully self-employed with profits generating a tax bill of £1,000+, you will almost certainly be required to make payments on account.

Payment Dates (Self Assessment Calendar)

31
Jan

31 January (annually)

Balancing payment for previous tax year (any underpayment) + 1st Payment on Account for current tax year (50% of prior year bill)

31
Jul

31 July (annually)

2nd Payment on Account for current tax year (remaining 50% of prior year bill)

Year-by-Year Worked Example

Sarah becomes self-employed in May 2025. Her first full tax year profit is £40,000. Let's trace her payments through.

Her 2025/26 tax liability:

  • Income tax: approximately £5,486
  • Class 4 NI (6% on £27,430): approximately £1,646
  • Total bill: £7,132

Sarah's Payment Schedule

31 Jan 2027 — Balancing payment (2025/26)£7,132
31 Jan 2027 — 1st POA for 2026/27 (50% of £7,132)£3,566
Total due on 31 January 2027£10,698 😱
31 Jul 2027 — 2nd POA for 2026/27£3,566

The first-year shock

Sarah has been freelancing for 20 months, but owes £10,698 in a single month. If she spent her earnings without setting aside enough, this can be devastating. The solution is to save consistently from day one.

How Much Should You Save Each Month?

A common rule of thumb: set aside 25–30% of your monthly profit into a separate savings account. Here's a more precise breakdown for common profit levels in 2026/27:

Annual ProfitIncome TaxClass 4 NITotal BillMonthly Save
£20,000£1,486£448£1,934£161
£30,000£3,486£1,048£4,534£378
£40,000£5,486£1,648£7,134£595
£50,000£7,486£2,248£9,734£811
£60,000£11,432£2,396£13,828£1,152
£80,000£19,432£2,596£22,028£1,836

Add student loan repayments on top if applicable. Use our self-employed calculator for your specific numbers.

How to Reduce Payments on Account

If your profit will be lower in the current year than the previous year, you can apply to reduce your Payments on Account via your Self Assessment online account. HMRC will recalculate the advance payments based on your estimated lower income. Be careful: if you reduce too aggressively and your profit turns out higher, HMRC will charge interest on the underpayment.

Pension contributions also reduce your taxable profit (and therefore your POA base). A £5,000 personal pension contribution on a £40,000 profit saves roughly 20% income tax = £1,000 in tax, which also reduces each POA by £500.

Making Tax Digital: What Changes from April 2026

From April 2026, self-employed individuals with annual income above £50,000 must use Making Tax Digital (MTD) compatible software and submit quarterly updates to HMRC. This replaces the annual Self Assessment return for qualifying income. The 31 January final declaration deadline remains. MTD expands to those earning above £30,000 from April 2027.

MTD does not change your payment dates

The 31 January and 31 July Payments on Account deadlines are unchanged under MTD. However, quarterly reporting gives you (and HMRC) more accurate in-year data, potentially making it easier to apply to reduce POA if your profits drop mid-year.

Sources

HMRC Self Assessment guidance · GOV.UK Payments on Account · HMRC MTD for Income Tax 2026. For guidance only — not financial advice.