Millions of self-employed people are starting to receive recognisable brown envelopes from HMRC on their doormats as reminders begin to arrive about payments on account.
Much of the focus on self-assessment is around the 31 January tax return deadline, when around 12 million people are usually expected to file a tax return for untaxed earnings from the previous financial year - but there are more dates for the self-employed to remember.
HMRC doesn’t only want to get its hands on money owed from the previous tax year – it also has a way to ensure self-employed people like me are keeping up to date with their taxes through payments on account.
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These are payments towards next year’s self-assessment tax bill, worked out as half of the tax owed the previous year and due by 31 July.
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HMRC is offering more ways to pay the bill, both online and via its app, where you can pay in instalments if you start early enough.
The taxman says more than 110,000 payments have been made through its app since April.
That all sounds very organised, and everyone wants to pay their fair share of tax, but there are reasons why the payments on account system can be unfair for the self-employed.
What are payments on account?
If you owe more than £1,000 in tax through self-assessment or haven’t already paid more than 80% through your tax code, HMRC adds payments on account to your bill.
This covers tax that you technically will have owed HMRC since the start of the current tax year in April.
One portion is added to your 31 January bill, and the rest is owed by 31 July.
For example, if your tax bill for the 2024/2025 tax year was £3,000.
The total tax to pay by midnight on 31 January 2026 would have been £4,500.
This includes your £3,000 tax bill for the previous financial year and the first payment on account of £1,500 - based on your previous earnings - towards your 2025/2026 tax bill
You will then owe a second payment on account of £1,500 on 31 July 2026.
If your tax bill for 2025/2026 ends up higher, you will also need to make a ‘balancing payment’ by 31 January 2027 as well as your first payment on account for the next tax year.
If your total tax for the year is £3,000, the only payment you will need to make by 31 January 2027 is your first payment on account for the following tax year.
Many accountants, tax experts and HMRC argue that this helps the self-employed, as if you sort your self-assessment early enough when the tax year ends in April, you can budget for these payments.
Technically, if you are organised, then you are giving yourself from April to January to pay half your current tax year's bill with the first payments on account instalment and then have another six months until the end of July for the rest.
You can ask HMRC to lower your payments on account if you think your earnings will fall, and you can get a refund if you pay too much. There is a risk that you may be charged interest if you underpay, though.
HMRC can charge late payment penalties starting from 5% if a tax payment is 30 days late, as well as 7.75% interest from the day after the payment is due, so it is important to pay.
"The payments on account scheme is designed to help people better manage the cost of their tax bill by splitting the amount into two payments and spreading the payments across the year," says Stevie Heafford, tax partner at accountancy firm HW Fisher.
"However, missing the deadline can be a costly mistake to make."
Paying tax is important, but the payments on account system fails to reflect the realities of being self-employed.
What if you have unpredictable earnings?
Being self-employed brings plenty of flexibility, but it also means my earnings can fluctuate.
As a freelance journalist, my income depends on the level of commissions I get each month and how generous editors are when it comes to shifts and rates.
So just because my latest tax return shows I have had a good year financially, that could all change in the next six months if commissions dry up.
It is like deciding to have an expensive meal at a restaurant once and then automatically being served and charged for the same thing the next time.
Invoicing issues for self-employed workers
Even if I know how much I am going to earn, another issue is actually getting paid.
There are plenty of publications that pay promptly, but in other cases, I could be waiting weeks or months to have an invoice paid, or in some cases, I may not ever get paid.
The average amount owed to freelancers in unpaid invoices is £5,230, according to the Association of Independent Professionals and the Self-Employed (IPSE).
That could even be the amount needed to pay a tax bill.
There are lots of professions with unpredictable income that this hits, especially if you have a sharp increase in earnings for one year.
“We work with a lot of barristers, and it can be a real issue for them,” says Scott-Taylor-Barr, principal adviser at Barnsdale Financial Management.
“They are being asked to pay taxes and then pre-pay tax on earnings they have billed for this year but may not see arriving in their bank accounts for years to come.”
Cash flow
The unpredictable earnings and invoicing issues can make it hard to start budgeting for payments on account, regardless of how early I start my tax return.
It therefore seems unfair to keep money locked up with HMRC for half a year when I could be using that for my own cash flow to pay bills or even myself.
Stephen Perkins, managing director of Yellow Brick Mortgages, highlights that you do not pay tax in advance of earning other sorts of income, plus you don't get paid interest on the pre-payment either.
“In the first year of self-employment, you have to save twice the normal amount of tax to not be caught out by this,” he says.
“It shows a complete lack of trust from HMRC in the self-employed. Let them declare their income and then pay their tax bill with a deadline for payment.
“It is up to the individual to save their tax and plan for the bill, not for HMRC to force pre-payment. It is not a fair taxation policy and should be scrapped.”
