The 150% shock: what actually happens in your first January
Almost every newly self-employed person in the UK gets the same nasty surprise. You do the maths, you work out that you owe roughly £9,000 in tax for your first year, you dutifully save it up, and then HMRC's calculation comes back asking for about £13,800 by 31 January.
Nothing has gone wrong. HMRC has not made a mistake, and you have not miscalculated your profit. What you are seeing is the payment on account system: on that first 31 January you settle last year's tax in full and hand over the first instalment towards the year you are already halfway through. Last year's bill plus half of it again equals 150%.
This article breaks down exactly how the system works, the two dates that matter, the two tests that decide whether you are in scope, when you can legitimately reduce your instalments (and when doing so will cost you interest), and the percentage of profit to actually put aside. All rates are checked against GOV.UK for the 2025/26 and 2026/27 tax years.
What a payment on account is
A payment on account (POA) is an advance instalment towards your next Self Assessment bill. HMRC does not know what you will earn this year, so it assumes you will earn roughly what you earned last year and asks you to pay that same amount in two equal halves, before the year has even finished being assessed.
Each instalment is 50% of your previous year's tax liability, as set out in HMRC's guidance on payments on account. The two due dates are:
- 31 January: first payment on account for the current tax year, due on the same day as the balancing payment for the previous tax year.
- 31 July: second payment on account for the same tax year.
Then, on the following 31 January, HMRC compares what you actually owed for that year against the two instalments you already paid. If you underpaid, the shortfall is your balancing payment. If you overpaid, HMRC refunds the difference or credits it against the next instalment.
It is essentially PAYE for the self-employed, just lumpier: an employee has tax taken every month, while you pay in two big blocks.
Why year one hurts and year two does not
An employee never notices this because they have no "first year" of arrears. You do. In your first year of trading there is no prior liability, so no payments on account are collected during the year. The bill lands whole, on 31 January after the tax year ends, and HMRC simultaneously starts the instalment cycle for the year you are already nine or ten months into.
So the first 31 January carries three things at once: the full tax on year one, plus the first half of the estimated tax on year two. That is 150% of a normal year's tax in a single payment. From then on it smooths out. As long as your profits are flat, each 31 January is just the second half of the previous year's estimate plus nothing, and each 31 July is one instalment. The pain is front-loaded, not permanent.
The rates that drive your payment on account
Your POA is based on income tax plus Class 4 National Insurance from your last return, so these are the numbers that matter. Figures below are for England, Wales and Northern Ireland, from GOV.UK income tax rates and self-employed National Insurance rates.
| Item | 2025/26 | 2026/27 |
|---|---|---|
| Personal allowance | £12,570 | £12,570 |
| Basic rate (20%) | £12,571 to £50,270 | £12,571 to £50,270 |
| Higher rate (40%) | £50,271 to £125,140 | £50,271 to £125,140 |
| Additional rate (45%) | Over £125,140 | Over £125,140 |
| Class 4 NIC main rate (6%) | Profits £12,570 to £50,270 | Profits £12,570 to £50,270 |
| Class 4 NIC upper rate (2%) | Profits over £50,270 | Profits over £50,270 |
| Class 2 NIC (voluntary) weekly rate | £3.50 | £3.65 |
| Class 2 small profits threshold | £6,845 | £7,105 |
| POA de minimis (no instalments below) | £1,000 | £1,000 |
| HMRC late payment interest | 7.75% from 9 January 2026 (base rate plus 4%) | |
Two points of detail. The personal allowance is withdrawn by £1 for every £2 of adjusted net income above £100,000, which is why the effective marginal rate between £100,000 and £125,140 is 60%. And Scottish taxpayers use Scottish income tax bands on their non-savings income, but Class 4 NIC and the payment on account rules themselves are identical across the UK. The late payment interest rate is published on HMRC's interest rates page and moves with the Bank of England base rate.
Worked example: a first-year freelancer on £48,000 profit
Sarah leaves her job and starts freelancing on 6 April 2025. Her first full tax year is 2025/26. After expenses, her taxable profit is £48,000. No other income, no student loan.
Income tax: £48,000 minus the £12,570 personal allowance leaves £35,430 of taxable income, all inside the basic rate band. £35,430 × 20% = £7,086.
Class 4 NIC: profit above the £12,570 lower profits limit is £35,430, all below the upper profits limit. £35,430 × 6% = £2,125.80.
Class 2 NIC: £0. Her profits are above the small profits threshold, so she is treated as having paid Class 2 and gets the National Insurance credit without paying anything.
Total 2025/26 liability: £9,211.80. That is above £1,000 and none of it was taxed at source, so payments on account kick in.
| Date | What it is | Amount |
|---|---|---|
| 31 Jan 2027 | Balancing payment for 2025/26 | £9,211.80 |
| 31 Jan 2027 | 1st payment on account for 2026/27 (50%) | £4,605.90 |
| 31 Jan 2027 total | 150% of one year's tax | £13,817.70 |
| 31 Jul 2027 | 2nd payment on account for 2026/27 (50%) | £4,605.90 |
Sarah's tax on £48,000 is 19.2% of profit. But the cash she needs by 31 January 2027 is £13,817.70, which is 28.8% of her first year's profit. That gap is the entire reason people get caught out. You can reproduce this calculation for your own figures with the UK sole trader tax calculator.
What is included in a payment on account, and what is not
This trips up even experienced filers. The instalment is calculated on income tax plus Class 4 NIC, minus anything already deducted at source. It specifically excludes:
- Capital gains tax. If you sold a property or shares, CGT is never spread across instalments. It is due in full with the balancing payment on 31 January.
- Student loan and postgraduate loan repayments. Also excluded from POA, also due in full on 31 January.
- Class 2 NIC. If you pay it voluntarily, it goes into the balancing payment only.
The practical consequence: your 31 January bill can be well above 150% of your tax if you also have a capital gain or a student loan. Meanwhile your payments on account will look "too low", and you will be tempted to think you have overpaid. You have not.
When you do NOT have to make payments on account
There are two escape routes, and you only need to fail one of them to be out of scope. HMRC will not ask for instalments if either:
- Your tax bill for the previous year was less than £1,000, or
- More than 80% of your tax for that year was already collected at source, for example through PAYE on a salary or tax deducted from bank interest.
That second test is why a lot of side-hustlers never see a payment on account. If you have a £45,000 salary taxed under PAYE and £4,000 of freelance profit on top, the tax on the freelance work is a small fraction of your total, so the 80% test knocks you out and you simply pay the freelance tax in one go each January.
It also means the year you go full-time self-employed is usually the year POA starts, because your PAYE proportion collapses. Expect it.
Reducing your payments on account: when it is smart, when it backfires
If you know your profits are falling, you do not have to pay instalments based on a year you will not repeat. You can claim to reduce them using the online Self Assessment service or form SA303. Common valid reasons: you lost a major client, you took maternity or parental leave, you went back to a PAYE job, you made a large pension contribution, or you bought capital equipment that generates a big allowance.
The catch is real. If you reduce your payments on account and your actual liability turns out higher, HMRC charges interest at 7.75% on the difference, backdated to the original due dates of 31 January and 31 July. You are not just paying the shortfall later, you are paying to have held HMRC's money.
The sensible rule: only reduce when you can point to a concrete, already-known reason your profit will be lower, and reduce conservatively. If you think profits will fall by 40%, cut the instalments by 25% and keep the buffer. And if you reduce them "just because cash is tight", expect an interest charge on top of the cash you did not have.
Also note the reverse case: you can voluntarily pay more than the calculated instalment if you know your profits have jumped. It reduces the balancing payment shock and stops interest from running.
Year two and the ratchet when profits rise
Growth creates its own squeeze. Say Sarah's 2026/27 profit rises to £60,000.
Income tax: £60,000 minus £12,570 leaves £47,430. The first £37,700 at 20% is £7,540. The remaining £9,730 at 40% is £3,892. Income tax = £11,432.
Class 4 NIC: £37,700 at 6% = £2,262, plus £9,730 at 2% = £194.60. Class 4 = £2,456.60.
Total 2026/27 liability = £13,888.60. She already paid £9,211.80 in instalments, so on 31 January 2028 she owes a balancing payment of £4,676.80, plus a first payment on account for 2027/28 of £6,944.30. That is £11,621.10 on the day, even though she has "already been paying".
Every time profit steps up, that step gets charged one and a half times in the following January: once as the balancing payment, once as the uplift in the instalment. Plan for it whenever you have a good year.
How much to actually set aside
Percentages, not vibes. Based on the 2026/27 rates above, and assuming no other income:
- Profit up to about £50,000: set aside 30% of profit in your first year. Steady state, once instalments are running smoothly, you can drop to around 20% to 22%.
- Profit £50,000 to £100,000: set aside 40% in year one, around 30% thereafter (the 40% band plus 2% Class 4 bites).
- Profit above £100,000: set aside 50% or more, because of the 60% effective band caused by the tapered personal allowance.
- Add a separate pot for VAT if you are registered. VAT is never yours, and it is not part of Self Assessment.
The tax set-aside calculator will give you a percentage for your own profit level, and HMRC's Budget Payment Plan lets you pay weekly or monthly by Direct Debit towards your next bill, which is the single most effective way to stop January from being an event. You must be up to date on your last bill to set one up.
If you cannot pay: penalties, interest and Time to Pay
Two things behave differently, and knowing which is which saves money.
Interest runs on everything paid late, including payments on account, at 7.75%. Late payment penalties of 5% at 30 days, 6 months and 12 months apply to the balancing payment, not to a payment on account in isolation. In other words, missing a July instalment is expensive but not penalised as such, while leaving the January balancing payment unpaid for 30 days triggers a 5% surcharge on top of interest. Full detail is on the GOV.UK penalties page.
If you cannot pay, set up a Time to Pay arrangement. You can do it online without phoning HMRC if you owe £30,000 or less, your tax returns are up to date, and you have no other tax debts or HMRC payment plans. Interest still accrues, but a Time to Pay plan agreed before the penalty date protects you from the 5% surcharges.
One last piece of timing: file early. The return for 2025/26 can be filed from 6 April 2026, and filing in April instead of January gives you nine months of notice about exactly what you owe. It does not move the payment date one day earlier. Under Making Tax Digital for Income Tax, which applies from 6 April 2026 to those with qualifying income over £50,000, quarterly updates are required, but they do not replace payments on account. The 31 January and 31 July dates stay exactly where they are.