Payments on account explained for sole traders in 2026

If you are a sole trader, payments on account can come as a shock the first time they appear on your Self Assessment bill. You may think you are only paying last year’s tax, then suddenly HMRC asks for extra money towards next year’s bill as well.

The good news is that payments on account are not a penalty or an additional tax. They are advance payments towards your next Self Assessment bill. The difficulty is that they can affect your cash flow if you have not planned for them.

This guide explains how payments on account work, when you need to pay them, how they are calculated, and what you can do if your income has dropped.

What are payments on account?

Payments on account are advance payments towards your next tax bill. They usually apply when your Self Assessment tax bill is more than £1,000 and most of your tax has not already been collected at source, such as through PAYE.

For sole traders, this often happens because tax is not deducted automatically from your sales, invoices or client payments. You receive your income first, then pay Income Tax and National Insurance through Self Assessment later.

This is why working with an accountant for sole trader businesses can be helpful. You are not just filing a return once a year. You are planning ahead so tax payments do not catch you off guard.

When do sole traders pay payments on account?

There are 2 payment dates to remember:

31 January
31 July

Your first payment on account is due by 31 January, alongside any balancing payment for the previous tax year. Your second payment on account is due by 31 July.

For example, if your Self Assessment bill for 2025/26 is due by 31 January 2027, HMRC may also ask you to make your first payment on account towards your 2026/27 bill on the same date. Your second payment on account would then be due by 31 July 2027.

That is why January can feel expensive for many sole traders. You may be paying last year’s remaining tax and making an advance payment for the current year at the same time.

How are payments on account calculated?

HMRC normally calculates each payment on account as 50% of your previous year’s tax bill.

Here is a simple example.

Your 2025/26 Self Assessment tax bill is £4,000. HMRC may ask you to pay:

£4,000 balancing payment by 31 January 2027
£2,000 first payment on account by 31 January 2027
£2,000 second payment on account by 31 July 2027

That means your January payment could be £6,000 in total, even though your actual tax bill for the previous year was £4,000.

This is where many sole traders get caught out. The system is logical once you understand it, but it can feel unfair if you were expecting to pay only one amount.

A good self-employed accountant can help you estimate this earlier, so you are not waiting until January to find out what you owe.

Do all sole traders have to make payments on account?

No, not every sole trader has to make payments on account.

You usually do not need to make payments on account if your previous Self Assessment bill was less than £1,000. You may also avoid them if more than 80% of the tax you owed was already collected outside Self Assessment, such as through PAYE.

For many full-time sole traders, payments on account are common because most of your tax is paid through your annual tax return rather than deducted monthly.

If you have recently moved from employment into self-employment, this can be one of the biggest changes. Instead of tax being taken from your wages, you need to set money aside yourself.

What if your income has gone down?

If your income has dropped, you may be able to reduce your payments on account. This can be useful if you had a strong year followed by a quieter one.

For example, if your tax bill was high last year because of a one-off contract, but your current year income is much lower, paying the same amount again may not make sense.

However, you need to be careful. If you reduce your payments too much and your final tax bill is higher than expected, HMRC can charge interest on the underpaid amount.

This is where proper sole trader accountancy services make a real difference. Rather than guessing, you can review your income, expenses and likely profit before asking HMRC to reduce the payments.

Why payments on account affect cash flow

As a sole trader, cash flow matters. You may have good sales on paper, but that does not always mean you have money sitting in the bank when HMRC payment dates arrive.

Late invoices, seasonal work, rising costs and personal withdrawals can all make tax planning harder. If you do not separate money for tax during the year, the January and July deadlines can feel stressful.

A practical habit is to put aside a percentage of your profit each month into a separate tax savings account. The right percentage depends on your income level, expenses, National Insurance position and any other income you have.

If you use cloud bookkeeping, a certified QuickBooks accountant can help you keep your figures up to date, so your expected tax bill is easier to track throughout the year.

5 common mistakes sole traders make

1. Thinking payments on account are extra tax

They are not extra tax. They are advance payments towards your next bill. If you overpay, it can be offset or refunded.

2. Forgetting the July deadline

Many sole traders remember 31 January but forget 31 July. Missing the second payment can lead to interest and unnecessary stress.

3. Spending VAT or tax money

If you are VAT registered, remember that VAT collected from customers is not your money to keep. A VAT return accountant can help you stay on top of VAT deadlines and avoid mixing up tax funds with business cash.

4. Reducing payments without checking the numbers

If your income has fallen, reducing payments may be sensible. But it should be based on realistic figures, not hope.

5. Leaving your tax return too late

The earlier your return is prepared, the sooner you know what you owe. A self-assessment tax return accountant can help you file accurately and plan your January and July payments in advance.

How to prepare for payments on account in 2026

The best way to manage payments on account is to treat tax as a regular business cost, not a once-a-year surprise.

Keep your bookkeeping updated each month. Review your profit regularly. Put money aside for tax before taking personal drawings. Check whether your income is rising or falling compared with last year. If your business is growing, remember that your final balancing payment may still be higher than the payments already made.

This is also important as Making Tax Digital continues to affect more sole traders. From April 2026, some sole traders with qualifying income over £50,000 need to follow Making Tax Digital for Income Tax rules, with lower thresholds following in later years. Better records now will make future reporting much easier.

If you want clearer figures throughout the year, sole trader accounting support can help you stay organised, plan ahead and avoid rushed decisions close to the deadline.

How Asmat & Co can help

Payments on account are much easier to manage when your records are accurate and your tax position is reviewed before the deadline.

Asmat & Co provides practical support for sole traders, individuals and small businesses. Whether you need sole trader accounting services, tax return help, VAT support or bookkeeping advice, the aim is simple: keep your accounts clear, compliant and easier to manage.

If you are based locally, Asmat & Co also provides trusted accountancy services in Slough for sole traders and businesses who want clear advice without hidden costs or unnecessary jargon.

For many accountants for self-employed individuals, the real value is not just filing the return. It is helping you understand what is coming next, so you can plan your cash flow with more confidence.

Frequently asked questions

Do payments on account apply to all sole traders?

No. They usually apply if your previous Self Assessment bill was more than £1,000 and most of your tax was not already collected outside Self Assessment.

Are payments on account an extra tax?

No. They are advance payments towards your next tax bill. If you pay too much, the overpayment can normally be offset or refunded.

What dates do I need to remember?

The 2 main payment dates are 31 January and 31 July. Your 31 January payment may include your balancing payment and your first payment on account.

Can I reduce my payments on account?

Yes, if you expect your tax bill to be lower than the previous year. However, you should only reduce them using realistic figures, because HMRC may charge interest if you reduce them too much.

What happens if I cannot pay HMRC on time?

You should contact HMRC as soon as possible. You may be able to discuss a Time to Pay arrangement, but you should not ignore the deadline.

If you are worried about your next Self Assessment bill or want help planning your payments on account, speak to Asmat & Co today. Their team can review your figures, explain what you owe, and help you stay prepared before the next HMRC deadline.