The January Bill That Lands Before Your Tax Return: A Sole Trader’s Guide to Payments on Account

Why there is a bill before the bill

You file your 2025/26 self-assessment return by 31 January 2027. If you are a sole trader or a partner, that date usually comes with two jobs: settle last year’s tax and make a first instalment towards next year’s. That second bit is the payment on account. It is not an extra tax. It is HMRC asking for a chunk of the tax it expects you to owe for 2026/27, based on what you have already earned.

The trigger is simple. If your previous year’s bill was more than £1,000 and less than 80% of it was collected at source — through PAYE, for example — HMRC will normally ask for payments on account. Each one is half of your previous year’s tax and Class 4 National Insurance, after any tax already deducted. Capital Gains Tax and student loan repayments are not included. If your bill was smaller, or most of it was already collected, you should not be asked for them.

The timing is what catches people out. On 31 January you pay any balancing amount for the previous tax year plus the first payment on account for the current one. On 31 July you pay the second payment on account. When your return for the current year is finally filed, the actual bill is worked out and any difference is settled.

Say your 2025/26 tax and Class 4 NIC bill comes to £6,000. HMRC will normally set two payments on account of £3,000 each for 2026/27. On 31 January 2027 you pay the £6,000 balancing amount plus the first £3,000. On 31 July 2027 you pay the second £3,000. If your 2026/27 profits end up higher, there will be a balancing payment later. If they end up lower, the payments on account may have been too high — which is where SA303 comes in.

The cashflow calendar nobody sticks on the fridge

Payments on account are much easier to handle when they stop being a January surprise and become a monthly habit. A simple tax pot is boring, but it works.

• November 2026: dig out your last return and estimate the January bill. Include the balancing amount and the first payment on account, not just one or the other.
• December 2026: move a set percentage of incoming cash into a separate tax pot. If December is a big month for your business, this is the moment to be disciplined.
• 31 January 2027: file your 2025/26 return and pay the balancing amount plus the first payment on account. Filing early does not change the payment date, but it does give you more time to spot a problem.
• April 2027: the new tax year starts. Keep feeding the tax pot, because the second payment on account is already in the diary.
• 31 July 2027: pay the second payment on account for 2026/27.

If you are a partner, the same idea applies, but the numbers come from your share of the partnership profits. Ask for the figures early enough that you are not waiting on someone else’s paperwork in the last week of January.

When profits fall, SA303 is the lever

If your profits have dropped since the last return, you do not have to grit your teeth and pay payments on account based on a better year. You can ask HMRC to reduce them. The form is SA303, and you can usually do it through your HMRC online account or on paper.

The important word is realistic. SA303 is not a way to make a bill disappear; it is a way to align the instalments with what you genuinely expect to earn. If you reduce the payments too far and the actual bill comes in higher, HMRC can charge interest on the shortfall. If you reduce them to nil, you still need to file your return and settle up later.

A sensible approach is to update your profit forecast first, then claim the reduction. Keep a note of why you chose the figure. If HMRC asks questions, you will have a clear answer rather than a vague hope.

If January is still too tight

Sometimes the numbers are right but the cash is not there. In that case, talk to HMRC before the deadline rather than after it. Time to Pay arrangements exist for exactly this situation, and they are usually easier to agree than people expect. Ignoring the bill is the one move that reliably makes things worse, because interest and penalties start stacking up.

It also helps to separate the two parts of the January payment in your head. The balancing amount is a past bill. The payment on account is a future one. If you only budget for the first, the second will feel like a double hit.

The Knox take

Payments on account reward a dull habit: put money aside while it is still yours. A sole trader who checks the January figure in November, keeps a tax pot topped up and uses SA303 honestly when profits fall will usually sail through the deadline. The panic is not really about the tax. It is about leaving the tax to the last minute.

If you are not sure whether your payments on account are right for the year ahead, bring your figures to Knox Accounting before the January rush. A short conversation now is cheaper than an interest charge later.