Payments on Account: How to Reduce Your Tax Bill When Income Fluctuates
- Adil Akhtar
- 3 hours ago
- 15 min read
The Audio Summary of the Key Points of the Article:
Understanding Payments on Account and Their Impact on Your Finances
What Are Payments on Account and Why Do They Matter?
Now, if you’re self-employed or running a small business in the UK, you’ve probably come across the term “payments on account” when filing your Self Assessment tax return. These are advance payments toward your next year’s tax bill, designed by HMRC to spread out your tax liability rather than hitting you with one massive bill. They apply if your previous year’s Self Assessment tax bill (income tax plus Class 4 National Insurance, if applicable) exceeds £1,000, and less than 80% of your tax was paid at source (e.g., through PAYE).
Each payment is typically 50% of the prior year’s tax bill, due on 31 January and 31 July. For example, if your 2024/25 tax bill was £5,000, you’d pay £2,500 on 31 January 2026 and another £2,500 on 31 July 2026 toward your 2025/26 tax bill. This system assumes your income stays steady, which can be a headache if your earnings fluctuate. Understanding this mechanism is crucial because it directly affects your cash flow, especially in lean years.
How Are Payments on Account Calculated?
Let’s break this down with a real-world example. Imagine you’re Siobhan, a freelance graphic designer in Manchester. Your 2024/25 Self Assessment shows a tax bill of £6,000 (income tax and Class 4 NIC). Since this exceeds £1,000 and you don’t have PAYE covering most of your income, HMRC expects two payments of £3,000 each for 2025/26. On 31 January 2026, you’d pay your £6,000 for 2024/25 plus the first £3,000 for 2025/26—a whopping £9,000 in one go. The second £3,000 is due by 31 July 2026.
If your actual 2025/26 tax bill ends up being £7,000, you’d owe a “balancing payment” of £1,000 (since £7,000 - £6,000 = £1,000) by 31 January 2027. But if your income drops, those £3,000 payments might be too high, tying up cash you need for rent or business expenses. HMRC bases these estimates on the previous year’s figures, which can feel like a blunt instrument for freelancers with unpredictable incomes.
Why Do Fluctuating Incomes Cause Problems?
None of us is a tax expert, but it’s easy to see why POAs can sting if your income swings wildly. Say you’re a contractor like Idris, who had a bumper year in 2023/24 with £80,000 in profits, leading to a £20,000 tax bill. For 2024/25, HMRC expects two £10,000 POAs. But if Idris loses a major client and his profits drop to £30,000, his actual tax bill might only be £7,000. Those £10,000 payments are now overkill, locking up £13,000 of his cash until he files his return and claims a refund.
This mismatch can strain your finances, especially if you’re already juggling business costs. Plus, HMRC doesn’t automatically adjust these payments—you have to proactively request a reduction, which we’ll cover later. The key takeaway? POAs are a cash flow trap for those with variable incomes, and planning ahead is essential.
Table 1: Payments on Account Thresholds and Deadlines (2025/26 Tax Year)
Criteria | Details |
Threshold for POAs | Tax bill > £1,000 and < 80% of tax paid at source (e.g., PAYE). |
Payment Dates | 1st: 31 January (with balancing payment for prior year); 2nd: 31 July. |
Calculation | Each payment is 50% of the previous year’s income tax + Class 4 NIC. |
Balancing Payment | Due 31 January if actual tax exceeds POAs; refund issued if overpaid. |
Reduction Deadline | Claim by 31 January after the tax year (e.g., 31 January 2026 for 2024/25). |
Source: GOV.UK, Self Assessment Payments on Account, updated May 2025
What Happens If You Don’t Pay on Time?
Be careful! Missing POA deadlines can land you in hot water. If you don’t pay by 31 January or 31 July, HMRC charges interest on late payments at 3.5% above the Bank of England base rate (as of April 2025, this is around 7.5% total). If your payment is over 30 days late, you’ll also face a 5% penalty on the unpaid amount, with further penalties at 6 months (5%) and 12 months (5%).
For instance, if Siobhan misses her £3,000 January payment, she could owe £225 in interest after a year, plus a £150 penalty after 30 days. These costs add up fast, so it’s worth setting reminders or using HMRC’s budget payment plan to pay weekly/monthly in advance. If you’re struggling, a “Time to Pay” arrangement can spread the cost, but you must contact HMRC before the deadline.
Real-Life Case Study: The Freelancer’s Dilemma
Now consider this: If you’re someone like Nia, a self-employed photographer in Cardiff, you might face a tricky situation. In 2023/24, Nia earned £60,000, resulting in a £12,000 tax bill. For 2024/25, HMRC expects two £6,000 POAs. But Nia’s bookings dropped due to a slow wedding season, and she estimates her 2024/25 profits at £35,000, with a tax bill of £6,500. Without action, she’d overpay £5,500 across her POAs, money she could’ve used for new camera gear. Nia’s story highlights why understanding and managing POAs is critical for freelancers. Later, we’ll explore how she could reduce her payments and avoid this cash flow crunch.
Strategies to Reduce Payments on Account and Manage Risks
How Can You Reduce Payments on Account?
Now, if you’re staring down the barrel of payments on account (POAs) that feel too steep for your expected income, don’t panic—there’s a way to lighten the load. HMRC allows you to reduce your POAs if you’re confident your tax bill for the current year will be lower than the previous one. You can do this by submitting an SA303 form through your HMRC online account or by contacting HMRC directly.
For instance, let’s say you’re Freya, a self-employed consultant in Bristol. Your 2024/25 tax bill was £10,000, so HMRC expects two £5,000 POAs for 2025/26. But after losing a major contract, you project profits of £25,000, with a tax bill of £4,500. By applying to reduce your POAs, you could lower each payment to £2,250, freeing up £5,500 in cash flow. The key is to act early—ideally before the 31 January deadline—so you don’t overpay and wait for a refund.
Step-by-Step Guide: Reducing Your Payments on Account
So the question is, how do you actually go about reducing your POAs? Here’s a practical, step-by-step guide to make it straightforward:
Estimate Your Income and Tax: Review your business records, invoices, and expenses to forecast your taxable profit for the current tax year. Use HMRC’s tax calculator (available at www.gov.uk/check-income-tax-current-year, verified active October 2025) to estimate your income tax and Class 4 National Insurance Contributions (NICs).
Compare to Last Year: Check your previous year’s Self Assessment tax bill (income tax + Class 4 NICs). If your projected bill is lower, calculate 50% of the new estimate for each POA.
Submit Form SA303: Log into your HMRC online account, navigate to “Self Assessment,” and find the “Reduce payments on account” section. Fill out the SA303 form with your new estimated tax figure. You can also call HMRC’s Self Assessment helpline (0300 200 3310) or send a paper form.
Double-Check Your Numbers: Ensure your income projection is realistic, factoring in expenses, allowances, and potential income spikes. Underestimating can lead to penalties, which we’ll cover shortly.
Confirm and Monitor: HMRC will confirm the adjusted POAs. Keep records of your submission and monitor your income throughout the year in case further adjustments are needed.
File Early for Refunds: If you’ve already overpaid, file your Self Assessment early (even before the 31 January deadline) to claim a refund of excess POAs.
This process can save you thousands in tied-up cash, but it requires careful planning. For example, Freya used her bookkeeping software to project her income and submitted an SA303 form in December 2025, reducing her January 2026 payment from £5,000 to £2,250—a game-changer for her cash flow.
Table 2: Tax Bands and Rates for 2025/26 (England, Wales, Northern Ireland)
Band | Taxable Income | Tax Rate | Class 4 NICs (Self-Employed) |
Personal Allowance | £0–£12,570 | 0% | 0% (below £12,570) |
Basic Rate | £12,571–£50,270 | 20% | 6% (£12,571–£50,270) |
Higher Rate | £50,271–£125,140 | 40% | 2% (£50,271–£125,140) |
Additional Rate | Over £125,140 | 45% | 2% (above £50,270) |
Source: HMRC, Income Tax Rates and Allowances, updated April 2025
What Are the Risks of Underestimating Your POAs?
Be careful! Reducing your POAs isn’t a free pass to lowball your tax liability. If you underestimate your income and your actual tax bill ends up higher than your reduced POAs, HMRC will charge interest on the underpaid amount at 7.5% (Bank of England base rate + 3.5%, as of April 2025). For instance, if Freya reduces her POAs to £2,250 each but her actual 2025/26 tax bill is £7,000, she’d owe a balancing payment of £2,500 (£7,000 - £4,500) plus interest of roughly £187 for a year. If the underpayment is significant and deemed careless, HMRC could impose penalties up to 30% of the unpaid tax. To avoid this, build a buffer into your estimate—say, 10–15% above your projected income—to account for unexpected earnings.
How Can You Mitigate Cash Flow Strain?
Now consider this: If your income fluctuates, managing cash flow is as critical as reducing POAs. Here are some practical strategies:
Set Up a Tax Savings Account: Each month, transfer a percentage of your income (e.g., 20–25%) into a separate savings account to cover tax and POAs. This helps avoid the January crunch.
Use Budget Payment Plans: HMRC’s Budget Payment Plan lets you pay weekly or monthly toward your tax bill in advance. Contact HMRC to set this up via your online account.
Negotiate Time to Pay: If you can’t meet a POA deadline, apply for a Time to Pay arrangement (www.gov.uk/difficulties-paying-hmrc, verified October 2025). For debts under £30,000, you can apply online to spread payments over 12 months, interest-free if paid on time.
Track Income Monthly: Use accounting software like QuickBooks or FreeAgent to monitor income and expenses in real-time. This helps you adjust POAs mid-year if your projections change.
For example, Tariq, a self-employed plumber in Birmingham, faced a £15,000 tax bill in 2023/24. Expecting a quieter 2024/25, he reduced his POAs to £5,000 each but used a tax savings account to set aside 20% of each invoice. When a last-minute contract boosted his income, he adjusted his July 2025 POA upward, avoiding interest and penalties.
What If You Have Mixed Income Sources?
Now, it shouldn’t be a surprise that things get trickier if you have multiple income streams, like self-employment plus a part-time PAYE job. POAs only apply to your Self Assessment tax (self-employed income, rental income, etc.), but PAYE can reduce your POA liability. If more than 80% of your tax is paid through PAYE, you’re exempt from POAs.
For example, Elowen, a part-time lecturer and freelance writer in Cornwall, earns £20,000 from PAYE and £30,000 from freelancing. Her 2024/25 tax bill is £8,000, but £5,000 is covered by PAYE (62.5%). Since this is below 80%, she still faces POAs, but she could reduce them if her freelance income drops. Always check your PAYE tax code to ensure it’s correct—overpayments via PAYE can offset POAs, but errors can lead to unexpected bills.
Case Study: The Part-Year Trader
Let’s look at another scenario. Ravi, a self-employed caterer in Leeds, started his business in July 2024, earning £40,000 by April 2025. His tax bill was £9,000, triggering £4,500 POAs for 2025/26. But Ravi plans to scale back to part-time work, projecting £20,000 in profits and a £3,500 tax bill. By submitting an SA303 form in January 2026, he reduced his POAs to £1,750 each, saving £5,500. However, he underestimated a late-year contract, increasing his tax bill to £5,000. He paid £1,500 extra in January 2027 plus £112 in interest. Ravi’s case shows the importance of conservative estimates and regular income tracking to balance savings and risks.
Key Takeaways for Managing Payments on Account Effectively
How Can You Stay Ahead of Payments on Account?
Now, let’s wrap things up with the most critical points you need to keep in mind about payments on account (POAs). Whether you’re a freelancer, a small business owner, or someone with a side hustle, these takeaways will help you navigate the system, save cash, and avoid HMRC’s sting. Below is a concise summary of the most important insights, each distilled into a single sentence to keep it clear and actionable. These points are designed to empower you to manage your tax obligations confidently, especially when your income fluctuates.
Payments on account are advance tax payments due on 31 January and 31 July, each typically 50% of your previous year’s Self Assessment tax bill (income tax plus Class 4 NICs), but only if it exceeds £1,000 and less than 80% of your tax is paid at source. This applies to self-employed individuals or those with untaxed income, like rental profits, and assumes your income stays stable year-on-year.
Fluctuating income can lead to overpaying POAs, tying up cash you might need for business or personal expenses, especially if your earnings drop significantly. For example, a freelancer like Siobhan, whose profits fell from £60,000 to £35,000, could have £5,500 unnecessarily locked up until she files her return.
You can reduce POAs by submitting an SA303 form through your HMRC online account or by contacting HMRC, but you must estimate your income accurately to avoid penalties. This is a lifeline for those expecting lower earnings, as it frees up cash flow for immediate needs.
Underestimating your POAs can result in interest charges at 7.5% (as of April 2025) on underpaid amounts, plus potential penalties up to 30% if HMRC deems your estimate careless. For instance, underestimating by £2,500 could cost you £187 in interest over a year, plus a £750 penalty in worst-case scenarios.
Using HMRC’s tax calculator (www.gov.uk/check-income-tax-current-year, verified October 2025) and tracking income monthly with tools like QuickBooks ensures accurate POA estimates. Regular monitoring helps you adjust payments mid-year if your income changes unexpectedly.
A tax savings account, where you set aside 20–25% of your income monthly, can prevent cash flow crunches when POA deadlines hit. This strategy helped Tariq, a plumber, cover his tax bill without scrambling for funds.
HMRC’s Budget Payment Plan allows you to pay weekly or monthly in advance, while a Time to Pay arrangement can spread overdue payments over 12 months for debts under £30,000. These options provide flexibility if you’re struggling to meet deadlines.
Mixed income sources, like self-employment plus PAYE, can complicate POAs, but you’re exempt if over 80% of your tax is paid at source. Elowen’s case showed how checking your PAYE tax code can prevent overpayments and reduce POA obligations.
Filing your Self Assessment early can speed up refunds if you’ve overpaid POAs, putting cash back in your pocket sooner. This was crucial for Nia, who reclaimed £5,500 after a slow year by filing in October instead of waiting until January.
Conservative income estimates with a 10–15% buffer and regular income tracking can minimize the risk of underpayment penalties while maximizing cash flow savings. Ravi’s experience underscored the need for a safety net when reducing POAs, as a late-year contract led to a small interest charge.
Why Is Proactive Planning Essential?
So the question is, how do you make all this work in practice? The key is to stay proactive—don’t let POAs catch you off guard. Regularly review your income, use HMRC’s tools, and don’t hesitate to adjust your payments if your earnings dip. For example, a self-employed caterer like Ravi, who scaled back his business, saved £5,500 by reducing his POAs but learned the hard way to include a buffer after underestimating a late contract. By combining accurate forecasting, early action, and HMRC’s support options, you can keep your tax bill manageable and your cash flow healthy.
Table 3: Common POA Scenarios and Actions (2025/26 Tax Year)
Scenario | Tax Bill (Previous Year) | Projected Tax Bill | Action | Potential Savings/Risks |
Freelancer with lower income | £10,000 | £4,500 | Reduce POAs to £2,250 each | Saves £5,500; risk of interest if underestimated |
Mixed PAYE/self-employed | £8,000 (62% via PAYE) | £6,000 | Check PAYE code, reduce POAs | Saves £4,000; risk of tax code errors |
Part-year trader | £9,000 | £3,500 | Reduce POAs to £1,750 each | Saves £5,500; risk of penalties if income spikes |
Source: Derived from HMRC Self Assessment Guidance, updated May 2025
What’s the Bigger Picture for UK Taxpayers?
Now consider this: If you’re a UK taxpayer with fluctuating income, POAs are more than just a tax quirk—they’re a test of your financial planning skills. The system isn’t designed to trip you up, but it does assume consistency that many self-employed people simply don’t have. By understanding the rules, leveraging HMRC’s tools, and staying vigilant, you can turn POAs from a cash flow drain into a manageable part of your financial strategy. Whether you’re a freelancer like Freya or a part-time trader like Ravi, the goal is the same: keep more of your hard-earned money working for you, not sitting in HMRC’s coffers.
FAQs
Q1: Who is exempt from making payments on account in the UK?
A1: Individuals are exempt from payments on account if their previous year’s tax bill was less than £1,000 or if more than 80% of their tax was paid at source, such as through PAYE.
Q2: Can payments on account be paid in instalments?
A2: Payments on account cannot be split into smaller instalments directly, but individuals can use HMRC’s Budget Payment Plan to make regular weekly or monthly payments toward their tax bill in advance.
Q3: What happens if someone overpays their payments on account?
A3: If someone overpays their payments on account, HMRC will refund the excess amount after they file their Self Assessment tax return, typically within a few weeks if filed online.
Q4: Can payments on account include Class 2 National Insurance contributions?A4: Payments on account only include income tax and Class 4 National Insurance contributions, not Class 2 contributions, which are paid separately.
Q5: How does HMRC notify someone about their payments on account?
A5: HMRC sends a statement of account after the Self Assessment tax return is filed, detailing the payments on account due for the next tax year, or individuals can check their HMRC online account.
Q6: Can someone reduce their payments on account mid-year?
A6: Yes, individuals can adjust their payments on account at any time before the 31 July deadline by submitting a revised SA303 form if their income projections change.
Q7: What is the penalty for late payment of a balancing payment?
A7: A late balancing payment incurs a 5% penalty if unpaid after 30 days, with additional 5% penalties at 6 and 12 months, plus interest on the overdue amount.
Q8: Can someone appeal an HMRC penalty for underestimating payments on account?
A8: Yes, individuals can appeal a penalty by providing a reasonable excuse, such as unforeseen circumstances, through their HMRC online account or by contacting HMRC directly.
Q9: Does income from savings or investments trigger payments on account?
A9: Yes, untaxed income from savings or investments, like dividends or interest, can trigger payments on account if the total tax bill exceeds £1,000 and meets other criteria.
Q10: Can someone use accounting software to estimate payments on account?A10: Accounting software like Xero or Sage can help estimate taxable profits and calculate potential payments on account based on real-time income and expense data.
Q11: What happens if someone stops being self-employed during the tax year?
A11: If someone ceases self-employment, they may still owe payments on account for the current tax year but can apply to reduce or cancel them if no further taxable income is expected.
Q12: Can payments on account be deferred due to financial hardship?
A12: Individuals facing financial hardship can apply for a Time to Pay arrangement to defer payments on account, subject to HMRC approval based on their circumstances.
Q13: How does HMRC calculate interest on underpaid payments on account?
A13: Interest is calculated daily on underpaid amounts at 3.5% above the Bank of England base rate, applied from the due date until the payment is settled.
Q14: Can someone reduce payments on account if they expect a tax relief claim?
A14: Yes, individuals can factor in expected tax reliefs, like pension contributions or business losses, when estimating and reducing their payments on account via the SA303 form.
Q15: What records should someone keep when reducing payments on account?
A15: Individuals should keep detailed records of income projections, expenses, and calculations used to justify the reduction, as HMRC may request evidence if audited.
Q16: Can payments on account apply to partnership income?
A16: Yes, payments on account apply to an individual’s share of partnership profits if their Self Assessment tax bill meets the threshold and criteria.
Q17: How does a new self-employed person know if they owe payments on account?
A17: New self-employed individuals will be informed by HMRC after their first Self Assessment return if their tax bill exceeds £1,000 and less than 80% is paid at source.
Q18: Can someone reduce payments on account for one payment but not the other?
A18: No, reducing payments on account applies to both the January and July payments, as HMRC adjusts the total estimated tax bill proportionally.
Q19: What happens if someone forgets to include a new income source when reducing payments on account?
A19: Forgetting a new income source may lead to underpayment, resulting in interest and potential penalties when the actual tax bill is calculated.
Q20: Can someone check their payments on account status online?
A20: Yes, individuals can view their payments on account due, paid, or adjusted through their HMRC online account under the Self Assessment section.
About The Author:
Adil Akhtar, ACMA, CGMA, CEO and Chief Accountant of Pro Tax Accountant, is an esteemed tax blog writer with over 10 years of expertise in navigating complex tax matters. For more than three years, his insightful blogs have empowered UK taxpayers with clear, actionable advice. Leading Advantax Accountants as well, Adil blends technical prowess with a passion for demystifying finance, cementing his reputation as a trusted authority in tax education.
Email: adilacma@icloud.com
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