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Self Assessment payments on account often surprise taxpayers because the January tax bill may include more than the tax due for the year just ended. A person may expect to pay one final liability, only to find that HMRC also asks for an advance payment towards the next tax year.
This is not a penalty. It is part of the Self Assessment collection system. However, it can create real cashflow pressure for landlords, directors, sole traders, consultants, investors and high earners whose tax is not fully collected through PAYE.
For London taxpayers with multiple income sources, payments on account often arise where rental profit, dividends, self-employment income, foreign income or capital gains increase the tax due outside payroll. Tax Accountant London supports individuals with Self Assessment tax return preparation where the tax calculation, payment dates and cashflow position need to be reviewed before the deadline.
How Self Assessment payments on account work
Self Assessment payments on account are advance payments towards the next tax year’s Income Tax and Class 4 National Insurance, where the rules apply. They are normally based on the previous year’s liability.
The first payment usually falls due on 31 January. The second usually falls due on 31 July. The January date can therefore include a balancing payment for the year just ended and the first advance payment for the next year.
The official rules on payments on account set out when they arise and how they interact with the balancing payment.
The practical effect is important. A taxpayer whose 2025/26 balancing liability is £8,000 may also be asked to pay £4,000 on account for 2026/27 by 31 January and another £4,000 by 31 July. The January payment is therefore not £8,000. It is £12,000.
Self Assessment payments on account for directors and landlords
Self Assessment payments on account are common for company directors who receive dividends, landlords with rental profit, and consultants with trading income. PAYE may cover salary, but it does not usually collect enough tax on dividends, rental income or self-employed profits.
Company directors are often caught where salary is low and dividends are significant. Landlords are affected where rental profits continue year after year. Sole traders and consultants may also face payments on account because their profits are taxed after the year ends.
Tax Accountant London also provides tax advice for directors and business owners where salary, dividends, rental income and tax payments need to be managed together.
Why the January bill feels excessive
The January bill feels excessive because it combines the past and the future. The balancing payment clears last year’s liability, while the first payment on account estimates the next year’s liability.
This can feel unfair where income has already fallen. For example, a landlord may sell a rental property, a consultant may stop trading, or a director may reduce dividends. In those cases, the next year’s liability may be lower than the payments on account calculated by the system.
The rules allow a taxpayer to claim to reduce payments on account where there is a reasonable basis. The official route to reduce payments on account should be used carefully because excessive reductions can lead to interest if the final liability is higher than expected.
A reduction should be based on evidence, not optimism.
Records needed before reducing payments
A credible reduction needs projected income figures for the current tax year. This may include management accounts, dividend plans, rental schedules, property sale dates, employment income, pension contributions, expected expenses and any foreign income.
A director should review company profits before reducing payments based on expected lower dividends. A landlord should check whether rental income has actually stopped or merely reduced. A sole trader should use up-to-date bookkeeping rather than a rough feeling that business has slowed.
TIP: Do not reduce payments on account simply because the January bill is inconvenient.
Reduce them only where the current year’s tax liability is genuinely expected to fall.
A practical example
A London consultant made £120,000 profit in 2025/26 and paid a large Self Assessment bill. During 2026/27, the consultant took employment and only carried out a small amount of freelance work.
If the system calculates payments on account using the old profit level, the advance payments may be too high. A reduction could be appropriate, but it should be supported by employment income, reduced trading income and expected expenses.
The adviser’s role is to make the reduction defensible. A careless reduction may only delay the tax and create interest later.
Before you pay or reduce the amount
Self Assessment payments on account should be reviewed before the January deadline, particularly where income has changed. The right approach is to calculate last year’s liability, estimate the current year, then decide whether the payment on account is reasonable.
This article is for general information only. It is not personal tax advice and should not be relied on for your own circumstances. For advice tailored to your position, contact Tax Accountant London before filing, restructuring, selling, disclosing or making a tax-sensitive decision.