Payments on Account Explained for Tradesmen

This guide is part of our Tax for Tradesmen section, where we explain how tax works for self-employed tradespeople.

Payments on Account explained simply:

• They are advance payments toward next year’s tax
• Each payment is normally 50% of the previous year’s tax bill
• The first payment is due 31 January
• The second payment is due 31 July

Introduction

Many self-employed tradesmen are shocked when they receive their first large tax bill. In some cases the amount owed can feel almost double what they expected.

This usually happens because of something called Payments on Account.

Payments on Account are advance payments towards your next tax bill. They are required by HM Revenue & Customs when your tax bill reaches a certain level.

Understanding how this system works is important because it can significantly affect how much money you need to set aside each year.

What Are Payments on Account?

Payments on Account are advance payments towards your next year’s tax bill.

Instead of waiting until the end of the following tax year, HM Revenue & Customs asks many self-employed people to pay part of their next tax bill early.

These payments are based on the tax you paid in the previous year.

Each Payment on Account is normally 50% of your previous tax bill.

When Payments on Account Apply

Payments on Account usually apply if:

• Your tax bill is more than £1,000, and
• Less than 80% of your tax has already been deducted at source (which is usually the case for self-employed workers).

When these conditions apply, you will normally be required to make two advance payments toward the following year’s tax.

When Payments on Account Do Not Apply

You usually won’t need to make Payments on Account if:

• Your tax bill is less than £1,000
• More than 80% of your tax is already deducted at source

When Payments Are Due

Payments on Account are split into two instalments each year.

First Payment

31 January

This is paid at the same time as your main tax bill for the previous year.

Second Payment

31 July

This is the second instalment towards the next tax year.

Both payments are sent to HM Revenue & Customs as part of the Self Assessment system.

Why the First Tax Bill Can Feel So Large

Many tradesmen are surprised because their first major tax bill includes two things:

1. The tax owed for the previous year
2. The first Payment on Account for the following year

For example:

A self-employed electrician has a £4,000 tax bill.

In January they may need to pay:

• £4,000 for the previous tax year
• £2,000 as the first Payment on Account

Total due in January: £6,000

A second payment of £2,000 would then usually be due in July.

This is why many self-employed people feel like their tax bill has suddenly doubled.

What Happens the Following Year?

The Payments on Account you make are credited towards your next tax bill.

When your next tax return is calculated, the payments you already made will be deducted from the total tax owed.

For example:

If your final tax bill is £4,500, but you already paid £4,000 through Payments on Account, you would only need to pay the £500 difference.

What If Your Income Drops?

If you expect your income to be lower in the following year, it may be possible to reduce your Payments on Account.

However, this should be done carefully. If payments are reduced too much and your income does not fall as expected, additional tax and interest could be charged by HM Revenue & Customs.

Many tradesmen choose to speak with an accountant before adjusting their payments.

How Tradesmen Can Prepare for Payments on Account

The best way to avoid surprises is to save regularly throughout the year.

Many self-employed tradesmen set aside 25–30% of their profit in a separate account to cover tax and National Insurance.

This makes it far easier to manage both the main tax bill and any Payments on Account when they become due.

Final Thoughts

Payments on Account are one of the most confusing parts of the UK tax system for new self-employed workers. The system is designed to spread tax payments over the year, but it can catch people off guard if they don’t understand how it works.

By knowing when these payments apply and setting money aside regularly, tradesmen can avoid unexpected bills and manage their finances with far less stress when dealing with HM Revenue & Customs.

Usefull Links

How Self-Employed Tax Workshttps://financefortradesmen.wordpress.com/2026/03/09/how-self-employed-tax-works-for-tradesmen-in-the-uk-complete-guide/

Avoid the January Tax Panichttps://financefortradesmen.wordpress.com/2026/03/09/how-to-avoid-the-january-tax-panic-as-a-self-employed-tradesman/