Reviewed by the Limited Company Accountant UK team. Figures are for the 2026-27 tax year unless stated.
Payments on account are advance instalments towards your next Self Assessment bill, each equal to half of your previous year’s tax, due on 31 January and 31 July. Directors who take most of their income as dividends often fall into the system because dividend tax is not collected at source, which is why the first January bill can feel so much larger than expected.
Key takeaways
- Each payment on account is 50% of your previous year’s Self Assessment liability.
- They are due on 31 January during the tax year and 31 July after it ends.
- They normally apply when your last bill was over £1,000 and less than 80% of your tax was collected at source.
- The first time you are caught, you can pay around 150% of the previous bill in January.
- You can ask HMRC to reduce your payments on account if you expect a lower bill, but incorrect claims can lead to interest and penalties.
What are payments on account?
Payments on account are HMRC’s way of collecting tax in instalments rather than in one lump sum. If you are in the system, you pay two advance instalments towards the following year’s tax bill, and then settle any difference through a balancing payment once the return is filed.
The instalments are based on last year’s numbers, not this year’s. HMRC assumes your income will be similar and asks for half of last year’s bill by 31 January in the tax year, and the other half by 31 July after the tax year ends.
Why directors are often affected
Payments on account usually apply if your previous Self Assessment bill was more than £1,000 and less than 80% of your total tax was already collected through PAYE or other deductions. Dividends are paid without any tax being deducted at source. If you take most of your income as dividends, the tax on them is usually not collected until you file, and the result is a bill that meets the £1,000 threshold quickly.
Directors who pay themselves a small salary and mostly dividends are therefore especially likely to be on payments on account. You can see how salary and dividends combine in our guide to paying yourself from a limited company.
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How HMRC calculates your payments
The calculation is simple. Take your total Self Assessment bill for the last tax year, less any tax collected at source, and divide by two. That is the amount of each payment on account.
| Item | Example |
|---|---|
| Tax due for 2025-26 (after tax already deducted) | £6,000 |
| Each payment on account for 2026-27 | £3,000 |
| First payment on account due | 31 January 2027 |
| Second payment on account due | 31 July 2027 |
If your actual 2026-27 bill turns out higher than £6,000, you pay the difference as a balancing payment on 31 January 2028. If it is lower, HMRC refunds the overpayment or credits it.
Why the first January bill is so big
The first year you fall into payments on account, you pay two things on 31 January: the balancing payment for the year just ended, and the first payment on account for the following year. Using the example above, if your 2025-26 bill is £6,000, you would owe £6,000 for the year just finished plus £3,000 as the first payment on account, a total of £9,000. That is 150% of the underlying bill.
This is where many new directors are caught out. The tax you pay in July is another £3,000, which is your second payment on account. Planning for the cash in advance is essential.
A worked example for a dividend-paid director
Imagine a director who takes a salary of £12,570 and dividends of £50,000 in 2025-26. The salary uses the personal allowance and is covered by PAYE, so it produces no further Income Tax. The dividends are mostly taxed at 10.75%, with some falling into the 35.75% band once total income passes £50,270, and the first £500 is covered by the dividend allowance. The resulting bill is paid entirely through Self Assessment because no dividend tax was withheld.
Because less than 80% of that tax was collected at source, and the bill is well over £1,000, the director is placed on payments on account. In January 2027 they must pay the full balancing amount for 2025-26 and the first payment on account for 2026-27, which is half of the 2025-26 bill. The cash required can be several thousand pounds more than the director expected, even though the actual tax rate has not changed.
The lesson is that the system is about timing, not extra tax. If dividends fall in 2026-27, the payments on account may turn out to be too high and HMRC will refund the difference once the return is filed. If you have a stable pattern of dividends, simply budget for the payments in advance.
Can you reduce payments on account?
Yes, if you reasonably expect your income to fall. You can apply online or by using form SA303 to reduce your payments on account. For example, you might reduce your dividends because the company’s profit has dropped, or pay yourself less to fund an expansion.
Be careful, though. If you reduce payments by too much and your actual bill turns out higher, HMRC charges interest on the shortfall and may apply penalties if the claim was careless. If you are not sure what your income will be, it is safer to pay the full amount and receive a refund later.
Practical ways to plan for the bill
- Transfer a percentage of each dividend (many directors use 20-30%) into a separate savings account.
- Use our dividend tax calculator to estimate your liability when you plan dividends.
- Review your pay mix each year. A smaller dividend now may reduce next year’s payments on account.
- Check your payments on account figures on your HMRC online account after filing, so there are no surprises.
What happens if you pay late?
HMRC charges interest on late payments from the due date. Further percentage penalties apply if the tax remains unpaid at 30 days, six months and twelve months. Interest rates change, so check the current rate on GOV.UK. If you are struggling to pay, contact HMRC early to discuss a Time to Pay arrangement.
When payments on account stop
Payments on account do not apply forever. If your previous bill was £1,000 or less, or if more than 80% of your tax is collected at source, you will not need to make them. Moving from a dividend-heavy pay mix to a more salary-based mix can also reduce the need for them, though that may not be the most tax-efficient option overall. The salary vs dividend calculator shows the trade-off.
The bottom line
Payments on account are not an extra tax. They are advance payments towards a bill you will owe anyway. The key is to understand them before your first big January payment, set cash aside regularly and review your pay mix each year.
Frequently asked questions
What is a payment on account?
It is an advance payment towards your next Self Assessment bill, equal to half of last year’s liability, due on 31 January and 31 July.
Do all company directors have to make payments on account?
No. They apply when your last bill was over £1,000 and less than 80% of your tax was collected at source, which is common for dividend-paid directors.
Why is my first January bill so high?
You pay the balancing amount for the year just ended and the first payment on account for the next year at the same time.
Can I reduce my payments on account?
Yes, if you expect lower income, you can apply online or use form SA303. Reducing them too much can lead to interest and penalties.
What happens if I overpay?
HMRC will refund the overpayment or credit it against future tax once your return is processed.
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