May 12, 2026
By Merranti

Why “It’s Only a Small Amount” Can Lead to Bigger Tax Problems

What are payments on account?

Payments on account are advance payments towards your next Self Assessment tax bill. They are most common for sole traders, landlords, freelancers and people with untaxed income, because HMRC has not collected enough tax automatically during the year.

GOV.UK explains that payments on account are payments towards your next tax bill, including Class 4 National Insurance if you are self-employed. Each payment is usually half of the tax you owed for the previous tax year.

The reason they cause confusion is simple: your January Self Assessment bill may not just be last year’s tax. It can also include an advance payment towards the next tax year.

Merranti’s Self Assessment key dates for 2026–2027 guide is a useful starting point because it shows how the January and July payment dates fit into the wider Self Assessment calendar.

Why payments on account exist

Self Assessment often deals with income that has not been fully taxed at source. This can include self-employed profits, rental income, dividends, savings income, foreign income, side income or other untaxed income.

GOV.UK’s guide to who must send a Self Assessment tax return explains the types of income and circumstances that can bring someone into Self Assessment.

Payments on account are HMRC’s way of collecting some of next year’s tax in advance, rather than waiting until the following January. That means the system is designed to spread the tax cost, but it can still create a cash-flow shock if you were not expecting it.

Merranti’s Self Assessment in 2026 article explains why Self Assessment should not be treated as just a January task. It is also a cash-flow and planning issue.

When do payments on account apply?

You usually need to make payments on account unless one of the exemptions applies.

GOV.UK says you do not need to make payments on account if your previous year’s Self Assessment tax bill was less than £1,000, or if more than 80% of the tax you owed was already collected outside Self Assessment, for example through PAYE or tax deducted at source. You can check the exact rule in GOV.UK’s payments on account guidance.

This is why two taxpayers with similar income can have different payment positions.

For example, an employee with some small untaxed income may not need payments on account if most tax was collected through PAYE. A sole trader with the same final tax bill may need payments on account because most of the tax was not collected at source.

Merranti’s Self Assessment tax return guide is useful here because it explains who may need to file a tax return in the first place.

How payments on account are calculated

Payments on account are normally calculated using the previous year’s tax bill.

If your previous year’s Self Assessment bill was £4,000, HMRC may ask for two payments on account of £2,000 each towards the next tax year.

The usual pattern is:

balancing payment for the previous tax year due by 31 January
first payment on account for the next tax year due by 31 January
second payment on account for the next tax year due by 31 July

GOV.UK’s Self Assessment statement guidance explains that each payment is usually half of the tax owed the previous year.

Merranti’s how to pay your Self Assessment tax bill article explains how the balancing payment and payments on account can appear together, and why the January amount can look higher than expected.

Why the first year can feel expensive

Payments on account often surprise people in their first profitable Self Assessment year.

For example, suppose your 2025/26 Self Assessment tax bill is £6,000. If payments on account apply, the 31 January 2027 payment may include:

£6,000 balancing payment for 2025/26
£3,000 first payment on account for 2026/27

That means the total due on 31 January could be £9,000, followed by another £3,000 on 31 July.

This does not mean HMRC has doubled the tax. It means HMRC is collecting last year’s tax and part of next year’s tax at the same time.

Merranti’s when are Self Assessments due guide is a useful internal link because it explains why January is not always the end of the Self Assessment cycle.

Who is most likely to be affected?

Payments on account commonly affect:

sole traders
landlords
freelancers
consultants
partners in partnerships
people with significant dividend income
people with untaxed savings income
people with side income
people whose PAYE code does not collect enough tax

Merranti’s Self Assessment registration guide covers common grey areas, including side hustles, online sales, property income and freelance work.

Landlords should also be careful because rental income often creates Self Assessment liabilities that are not collected automatically. Merranti’s MTD ITSA and property landlords guide is useful if rental income is also bringing the landlord close to Making Tax Digital requirements.

Sole traders should review payments on account alongside profit, expenses and cash-flow planning. Merranti’s year-end tax planning guide for sole traders gives a wider view of the tax year-end issues that can affect the final bill.

Can you reduce payments on account?

Yes, but only where there is a genuine reason.

If you know your income or tax bill will be lower than the previous year, you can ask HMRC to reduce your payments on account. GOV.UK explains how to do this online or by post using form SA303 in its payments on account guidance.

This can be useful if:

your self-employed profit has fallen
you stopped trading
rental income has dropped
you sold a rental property and no longer receive rent
your dividends are lower
more tax is now being collected through PAYE
you had a one-off high-income year that will not repeat

However, the reduction should be realistic. If you reduce payments too far and the final tax bill is higher than expected, HMRC can charge interest on the shortfall.

Merranti’s Self Assessment key dates and penalties guide is useful here because it explains how interest and penalties can build when payments are missed or understated.

Should you reduce payments on account just to help cash flow?

Usually, no.

Reducing payments on account is not meant to be a short-term cash-flow tool if the tax will still be due. If your income is genuinely lower, reducing payments can make sense. If your income has not fallen, reducing payments may only delay the problem and create interest.

A better approach is to forecast the expected tax bill before the payment deadline. That can show whether a reduction is justified, whether full payment is needed, or whether you should speak to HMRC about payment support.

Merranti’s Self Assessment in 2026 article explains why the tax return should be used as a planning tool, not only a filing exercise.

What if you cannot afford to pay?

If you cannot pay your Self Assessment bill, do not ignore it.

GOV.UK explains the official process for paying your Self Assessment tax bill and gives options for paying HMRC. If you are struggling to pay, HMRC may allow a Time to Pay arrangement in some cases.

Merranti’s Self Assessment key dates and penalties guide explains that Time to Pay arrangements are generally better dealt with before penalties escalate. Merranti’s how to pay your Self Assessment tax bill guide also covers payment options and what can happen if the deadline is missed.

If tax is unpaid, interest can apply from the due date. Late payment penalties can also arise if the tax remains unpaid for long enough. GOV.UK explains late payment penalties in its Self Assessment penalties guidance.

Payments on account and capital gains

Payments on account are not always based on every type of tax in the same way.

GOV.UK’s payments on account guidance says payments on account are towards the next tax bill, including Class 4 National Insurance if you are self-employed. It also explains that capital gains can form part of the balancing payment due by 31 January, depending on the return.

Capital gains can create additional reporting duties. If you sell a UK residential property and CGT is due, the reporting deadline can be much earlier than the Self Assessment filing deadline. Merranti’s CGT on residential property sales article explains the 60-day reporting issue, and Merranti’s CGT allowances and rates guide covers the wider CGT position.

How to plan for payments on account

The best way to avoid payment surprises is to review your tax position before January.

Practical steps include:

prepare your accounts early
estimate your tax bill before the deadline
check whether payments on account apply
check whether income has genuinely fallen
avoid reducing payments without evidence
keep money aside throughout the year
use bookkeeping records to track profit
ask for help before the deadline if cash flow is tight

Merranti’s business expense guide is useful if you are self-employed and want to make sure expenses are correctly recorded before the tax return is prepared. Merranti’s cash basis guide may also be relevant for sole traders working out taxable profits.

If you are already concerned about HMRC asking questions, Merranti’s guide on what to do if HMRC opens an enquiry into your tax return explains how to respond properly and avoid making the position worse.

Speak to Merranti before reducing or missing a payment

Payments on account are one of the most common reasons Self Assessment taxpayers get caught out. The rules are not complicated in principle, but they can create real cash-flow problems if the taxpayer only discovers them in January.

Merranti’s Self Assessment key dates guide is a useful starting point, while its guides on how to pay your Self Assessment tax bill, Self Assessment key dates and penalties, Self Assessment registration and who needs to file a Self Assessment tax return cover the main connected issues.

If your Self Assessment bill is higher than expected, or you are considering reducing payments on account, contact Merranti Accounting before the payment deadline. Merranti can help review whether the payments are correct, whether a reduction is justified, and what steps to take if cash flow is tight.

What are payments on account?
Payments on account are advance payments towards your next Self Assessment tax bill. GOV.UK explains this in its guide to understanding payments on account.

When are payments on account due?
Payments on account are normally due by midnight on 31 January and 31 July. Merranti’s Self Assessment key dates guide explains how these dates fit into the wider tax calendar.

Why is my January Self Assessment bill higher than expected?
January can include both the balancing payment for the previous tax year and the first payment on account for the next tax year. Merranti’s guide to paying your Self Assessment tax bill explains what may be included in the amount due.

Can I reduce my payments on account?
Yes, if you expect your tax bill to be lower than the previous year. GOV.UK explains how to reduce payments on account in its payments on account guidance.

What happens if I reduce payments on account too much?
If you reduce them and your final tax bill is higher than expected, HMRC can charge interest on the difference. GOV.UK explains this in its payments on account guidance.

What if I cannot afford to pay?
You may be able to arrange a Time to Pay plan with HMRC. Merranti’s Self Assessment key dates and penalties guide explains why it is better to act before penalties build up.