A January tax bill can feel unexpectedly large, even when your business has had a good year. The usual reason is not simply the tax due for the previous year. It is that self assessment payments may also include an advance payment towards the following tax year. Understanding this before the deadline gives you time to protect your cash flow rather than react under pressure.
For sole traders, partners, landlords, contractors and company directors with income outside PAYE, Self Assessment is how HMRC collects tax that has not already been deducted at source. The return calculates what you owe, but paying it is a separate responsibility – and the timing can catch people out.
What self assessment payments cover
Your Self Assessment calculation can include Income Tax on profits, rental income, dividends, savings income or other taxable income. It may also include Class 4 National Insurance for self-employed people. If you have Capital Gains Tax to pay through Self Assessment, this can appear on your return too, although it is not generally included when working out payments on account.
The amount due depends on your individual circumstances. A director drawing a salary and dividends, for example, may have some tax collected through PAYE but still owe further tax on dividends. A sole trader’s bill will usually be driven by business profit after allowable expenses, rather than the money withdrawn from the business.
This distinction matters. Money in the bank is not always profit, and profit is not always available to spend. Setting aside tax as income arrives is one of the simplest ways to avoid a difficult January.
The main Self Assessment payment dates
The tax year runs from 6 April to 5 April. For most people filing online, the deadline for submitting a return and paying the balancing payment is 31 January following the end of that tax year.
For example, the 2024/25 tax year ended on 5 April 2025. The online return and any tax still due for that year must normally be submitted and paid by 31 January 2026.
A balancing payment is the difference between what you have already paid towards the year and your final tax bill. However, many taxpayers will also need to make the first payment on account on that same 31 January date. The second payment on account is then due on 31 July.
If you are new to Self Assessment, the first January payment can therefore be the most demanding. You may be paying the full bill for the year just ended, plus an advance towards the next one. It is not a duplicate charge, but it can certainly feel like one if it has not been planned for.
Paper returns have an earlier deadline, normally 31 October after the end of the tax year. Online filing gives more time, but leaving it until January is rarely the best option. Completing the return earlier gives you a clear figure to budget for and more time to resolve missing information.
How payments on account work
Payments on account are advance instalments towards your next Income Tax and Class 4 National Insurance bill. Each payment is usually 50% of your previous year’s relevant liability.
Suppose your 2024/25 Income Tax and Class 4 National Insurance bill is £8,000. By 31 January 2026, you would normally pay that £8,000 balancing payment, plus a first payment on account of £4,000 for 2025/26. A further £4,000 would be due by 31 July 2026. Once your 2025/26 return is completed, HMRC compares the advance payments of £8,000 with the final bill. You then pay any shortfall or receive credit for an overpayment.
Payments on account are not normally required if your previous year’s relevant tax bill was below £1,000, or if at least 80% of that tax was collected at source, such as through PAYE. This is why an employee with modest additional income may not have the same payment pattern as a self-employed person or contractor.
The system is designed to collect tax closer to the point income is earned. That may be sensible in principle, but it can be challenging where profits vary significantly from year to year.
Can you reduce a payment on account?
Yes, if you have a genuine reason to expect that your current year tax bill will be lower. This may apply where profits have fallen, a contract has ended, you have taken time away from work, or your taxable income has reduced for another clear reason.
A reduction should be based on realistic figures, not optimism. If payments are reduced too far and the final bill is higher than expected, HMRC can charge interest on the underpaid amount. For that reason, it is often worth preparing a sensible profit forecast before making a claim.
Equally, there is little benefit in leaving payments on account unchanged when a substantial fall in income is well evidenced. The right approach depends on the quality of your records, how predictable your income is and whether there are significant expenses or changes still to be factored in.
How to plan for your tax bill throughout the year
The most reliable tax planning is usually not complicated. It starts with keeping business and personal spending separate, maintaining up-to-date bookkeeping and reviewing profitability regularly. If your figures are six or nine months behind, a January bill will always feel more uncertain than it needs to.
Many business owners choose to move a proportion of income into a separate savings account as they are paid. The right percentage varies. It depends on profits, other income, pension contributions, tax already deducted, allowable costs and whether payments on account apply. A flat percentage can be a useful starting point, but it should be reviewed as your business changes.
For company directors, it is also sensible to consider personal tax before declaring dividends or making large withdrawals. A company may have enough cash to make a payment, but the personal tax position needs to be understood alongside corporation tax, VAT, payroll and future working capital needs.
Regular management information makes this much easier. Knowing your year-to-date profit, likely tax exposure and expected cash position allows better decisions before deadlines become urgent.
What happens if you pay late?
HMRC charges interest on overdue tax, and the rate can change over time. Late payment penalties may also apply. In broad terms, penalties can arise when tax remains unpaid 30 days, six months and 12 months after the due date, with each charge calculated as a percentage of the outstanding balance.
Late filing is a separate issue and can result in penalties even if you have no tax to pay. Filing on time but failing to pay is not ideal, but it is generally better than missing both obligations. It establishes the amount due and gives you a clearer basis for discussing payment arrangements.
If you cannot pay in full, contact HMRC as early as possible to discuss a Time to Pay arrangement. HMRC may agree an instalment plan where circumstances support it, but this is not automatic and interest will usually continue to accrue. Do not ignore letters or assume the matter will resolve itself after filing.
Practical steps before 31 January
Start by gathering your records well ahead of the deadline. This may include business income and expenses, bank interest, dividend vouchers, PAYE information, pension contributions, rental figures and details of any capital gains. Accurate records reduce the risk of overstating or understating your tax position.
Then submit the return early enough to understand the bill. If payments on account are due, look at both January and July rather than treating January as a one-off event. If the amount is higher than expected, review whether a valid reduction is appropriate or whether an instalment arrangement may be needed.
Finally, build the next tax bill into your normal financial routine. Tax planning works best when it is part of monthly bookkeeping and cash-flow management, not a task reserved for winter.
For clients who want a clearer view of what is due and when, Coombs Chartered Accountants can turn the calculation into a practical plan – helping you meet your obligations while keeping the bigger financial picture in view.
