When January Asks Twice: Planning for Self-Assessment Payments on Account

For many sole traders and landlords, the most unsettling part of the 31 January deadline is not the tax due for the year just ended. It is the additional demand that appears alongside it: the first payment on account towards the following year. At Barr Financial Services, the practical starting point is to separate the two charges before deciding how much cash to hold back in December.

Why one deadline can carry two charges

Payments on account are advance payments towards your next Self Assessment bill. They are not a separate tax. They are a way for HMRC to collect part of the expected liability before the return for that year is filed. Each payment is normally half of the previous year's Self Assessment tax bill, after allowing for tax already collected at source, such as PAYE.

The first payment on account is usually due on 31 January, alongside any balancing payment for the year just ended. The second is due on 31 July. So the January demand can contain two distinct elements: the final settlement for the 2025/26 return and the first instalment towards 2026/27.

That structure is straightforward once it is understood. It becomes difficult when the January total is read as a single bill and compared only with the tax figure on the return.

Who is most likely to be caught out

Payments on account generally apply where the previous year's Self Assessment bill was more than £1,000, or where less than 80% of the tax due was collected at source. Newly self-employed people can be surprised the year after their first return. A first return may produce a bill without payments on account; the following January can then bring both the balancing payment and the first advance instalment.

Landlords with rental profits, people with substantial side income and those whose savings or investment income is taxed through Self Assessment can face the same experience. The common thread is not a particular trade or income level. It is a liability that has crossed the relevant threshold and a cash plan that has been built around one payment rather than two.

Checking the figure: a simple arithmetic test

The figure is worth checking before December spending decisions are made. Start with the 2025/26 tax calculation and identify the tax and Class 4 National Insurance due after tax deducted at source. Each payment on account for 2026/27 should normally be half of that amount, unless a reduction has already been claimed or the thresholds do not apply.

Then check the HMRC online account for payments already made towards 2025/26. The January balancing payment should reflect those earlier instalments. If the numbers do not reconcile, gather the tax calculation, the payment history and any previous reduction claim before contacting HMRC. A discrepancy is easier to resolve with documents in hand than with a payment made in haste.

It is also worth confirming the 31 July 2027 instalment now. Even though it falls in the next financial year, it is part of the same liability and should inform how much is set aside from December onwards.

If income has fallen: reducing payments on account

Where income has fallen materially, it may be appropriate to claim a reduction in payments on account. This can be done through the HMRC online account or by using form SA303. The claim should be made before the payment date and should be based on a reasonable estimate of the coming year's liability.

A reduction is not a loophole. If the estimate proves too low, HMRC can charge interest on the shortfall. The safer approach is to reduce the payments to a figure that can be supported by evidence: current bookings, rent receipts, invoices, or a revised profit forecast. A modest reduction that is easy to justify is usually better than an aggressive one that creates a later problem.

A December checklist for January cash flow

• Pull the 2025/26 tax calculation and the HMRC payment statement into one place.
• Separate the balancing payment from the first payment on account.
• Confirm whether payments on account apply at all, particularly if this is a first or second year of self-employment.
• Check that each instalment is broadly half of the previous year's qualifying tax, less tax collected at source.
• Note the second instalment due on 31 July 2027, even if it is not paid from this year's cash.
• If income has fallen, prepare a reduction claim before 31 January rather than after it.
• Move the estimated January total into a separate savings or tax account by mid-December.
• Schedule the payment for mid-January, allowing time for banking delays and verification.
• Review December fixed costs and seasonal spending so the tax reserve is not used as a temporary overdraft.

Setting aside without derailing Christmas

A tax reserve should be funded from the same planning that covers stock, rent, wages and household bills. For sole traders, one workable method is to transfer a fixed percentage of December receipts into a tax account as they arrive. For landlords, the same approach can be applied to rent received in December. The aim is not to freeze all seasonal spending. It is to make the January payment a known commitment rather than a surprise.

Where cash is tight, the priority is to cover the balancing payment and the first payment on account before discretionary spending. Card borrowing or a short-term loan may appear to solve the January problem, but it shifts the cost into the following months and can make the July instalment harder to meet.

The cost of guessing

Late payment interest can accrue from the due date, and late payment penalties may apply if the deadline is missed. Those costs are avoidable with a modest amount of December administration. The objective is not to make January painless. It is to make it predictable, with the second charge identified, checked and funded before the Christmas period takes over.