Ashar PervaizYour First Tax Bill Is 150% of the Tax You Owe
You finish your first Self Assessment return, the calculation appears, and it says you owe £3,000. You have saved for that. Then you look at what HMRC actually wants by 31 January and the figure is £4,500. No error has been made, nothing has been double counted, and there is nobody to appeal to, because the extra £1,500 is not tax on the year you just filed. It is the first instalment on the year you are living through right now. This is how payments on account work in the UK, and almost nobody is told about them until the demand arrives.
The System Asks You to Catch Up and Keep Up at Once
Employment collects tax as you earn it. Every payslip hands a slice to HMRC before the money reaches you, so by the end of the year the debt is already settled. Self-employment has no such mechanism. You earn for a full twelve months, the tax year closes on 5 April, and only then does anyone work out what is owed — with the payment not due until the January after that.
Left alone, that arrangement would have HMRC waiting up to twenty-two months for money on income earned in the first week of a tax year. Payments on account exist to close that gap. Rather than ask you to predict your own income, the rule takes the only hard number available — what you owed last year — and asks for half of it twice, once in January and once in July.
It is a reasonable design and it is defensible from HMRC's side. The difficulty is entirely in the transition. Once you are inside the system the instalments simply replace the lump sum. But the year you enter it, you are settling one year and prepaying another simultaneously, and eighteen months of tax falls due within six months.
Where the Extra Half Comes From
The arithmetic is short enough to do on the back of the calculation itself. Take the bill for the year you have filed. Subtract whatever instalments you already paid during that year. The remainder is the balancing payment. Then add half of that same bill as the first instalment towards the current year.
In a first year there is nothing to subtract, because no instalments were ever set. So the whole bill survives as the balancing payment, and half of it is added on top:
| Due date | Balancing payment | Instalment | Total demanded |
|---|---|---|---|
| 31 January, first year | £3,000 | £1,500 | £4,500 |
| 31 July, first year | — | £1,500 | £1,500 |
| Six months | £3,000 | £3,000 | £6,000 |
£6,000 leaves your account inside six months against a tax bill of £3,000. Every penny is correctly charged. Half of it is simply money you would otherwise have paid a year later, brought forward permanently.
That last word is the one to notice. This is not a loan and there is no point in the future where the timing reverses and you get a year off. You have moved onto a schedule that runs six months ahead of the old one, and the cost of moving is a single payment of half a year's tax, paid once, in the January you join.
Two Tests Decide Whether Any of This Applies
Plenty of people file a return and never encounter an instalment, which is why the demand blindsides those who do. Two conditions both have to be true before HMRC sets them.
The first is size: your Self Assessment bill has to exceed £1,000. A bill of £980 is settled in one payment and forgotten. A bill of £1,020 brings instalments of £510 with it. Forty pounds of extra tax changes the January demand by more than five hundred.
The second is about where your tax is already coming from. If 80% or more of what you owe has been collected at source — through PAYE on a salary, or deducted before payment under the Construction Industry Scheme — the instalments do not apply. The logic is that HMRC is already being paid as you earn, so there is no timing gap left to close.
That second test is what separates two people with identical tax bills:
| Situation | Total tax | Collected at source | Share | Instalments? |
|---|---|---|---|---|
| Employed, small side income | £2,400 | £2,100 | 87.5% | No |
| Employed part time, growing freelance work | £2,400 | £1,800 | 75.0% | Yes |
| Fully self-employed | £2,400 | £0 | 0.0% | Yes |
The middle row is the one that catches people, because it looks from the inside like the row above it. A salaried job is still covering most of the tax, the freelance work still feels incidental, and the test is failed by three and a half percentage points. If your own split is anywhere near the line, the percentage calculator will settle it in one step — divide the tax already deducted by the total and see which side of 80% you land on.
The Second Year Is Cheaper Than the First
The 150% figure is a one-off, and missing that is what turns an unpleasant surprise into an unnecessary panic. It is the entry price, not a permanent markup.
Follow the same £3,000 earner into a second year with steady income. By the time that return is filed, £3,000 of instalments have already been paid during the year. The balancing payment is therefore nothing, and January asks only for the next instalment:
| Year | Tax for the year | Already paid in instalments | Balancing payment | Plus new instalment | January demand |
|---|---|---|---|---|---|
| First | £3,000 | £0 | £3,000 | £1,500 | £4,500 |
| Second, income flat | £3,000 | £3,000 | £0 | £1,500 | £1,500 |
| Third, income up a third | £4,000 | £3,000 | £1,000 | £2,000 | £3,000 |
| Fourth, income back down | £3,000 | £4,000 | −£1,000 | £1,500 | £500 |
Two things fall out of that table. A flat year costs £1,500 in January rather than £4,500, so the shock genuinely does not repeat. And a falling year can produce a January demand smaller than the instalment itself, because the overpayment from the previous year is set against it before anything else is added.
The third row is the one to plan around. Income rose by £1,000 of tax, but the January demand rose by £1,500 — the extra tax plus half of it again, because the instalment was recalculated upwards on the same day the shortfall was discovered. Growth always arrives in the demand at one and a half times its size.
A Bad Year Does Not Lower the Instalment By Itself
The instalments are built from last year's figures and know nothing about this year. If your income has halved, HMRC will still ask for half of a bill you are no longer going to owe, and will keep asking until a return tells it otherwise.
You are allowed to correct this in advance. A claim to reduce payments on account — made through your online account or on form SA303 — replaces HMRC's figure with your own estimate of this year's liability, and both instalments are reset to half of it.
The catch is worth stating plainly, because it is where an innocent optimism turns expensive. If you reduce the instalments and the year turns out better than you predicted, interest is charged on the difference from the dates the original payments were due — not from the point the return revealed the shortfall. Cut a January instalment and discover the truth thirteen months later, and the interest has been accruing for all thirteen.
So a reduction is a forecast you are held to rather than a deferral you can undo. Reduce to what you actually expect, not to what you can comfortably afford this month, and if the two differ, the problem is a cash flow problem rather than a tax one.
What Falls Due Between Now and That January
The dates for the 2025/26 tax year, which closed on 5 April 2026, run as follows.
| Date | What is due | If you miss it |
|---|---|---|
| 5 October 2026 | Register for Self Assessment if this is your first year | A penalty based on the tax owed, not a flat fee |
| 31 October 2026 | Paper return | Late filing penalty — or file online instead |
| 31 January 2027 | Online return, balancing payment and first instalment | Penalty for the return, interest on the payment |
| 31 July 2027 | Second instalment | Interest from the due date |
The filing deadline and the payment deadline share 31 January, and treating them as one date is the mistake that quietly costs money. A return filed in October is not paid in October — the money is still due in January. But filing early tells you what January holds while there are still three months to arrange it, which is the only part of this timetable you have any control over.
If you want the gap in plain numbers rather than months, the days between calculator will tell you exactly how long you have left to put the money aside.
Saving for a Bill That Lands in Two Pieces
The usual advice is to set aside a fixed share of everything you invoice. It is good advice and it is incomplete, because in your first year the share has to cover one and a half years of tax rather than one.
Work out your expected liability for the year — the freelancer tax calculator will give you income tax, Class 4 National Insurance and the effect of platform fees in one place — and then set aside 150% of it across that first year rather than 100%. On a £3,000 expected bill that is £4,500 saved by 31 January, which is exactly the demand, and the July instalment is then met from the following year's savings at the normal rate.
From the second year the multiplier drops back to 100%, because the instalments you pay during the year are the tax for that year. You are simply paying it in two halves, in advance, instead of once in arrears.
A word on the percentage itself: the share of income to set aside is not your tax band. Someone paying basic rate tax and Class 4 National Insurance on profits is parting with rather more of each extra pound than the headline 20% implies, and rather less of their total income than the same figure suggests, because the personal allowance sits underneath untouched. That distinction — between the rate on the next pound and the rate across everything — is the one worth getting right before choosing a number, and it is set out in marginal versus effective tax rates.
The Thing Worth Remembering in January
When the demand appears and it is larger than the calculation you just agreed to, the useful instinct is not to assume a mistake. It is to split the figure in two. One part is last year, finished and settled. The other part is this year, started early. Neither is a penalty and neither is negotiable, but knowing which is which turns an alarming total into two ordinary ones.
And the first January is the worst one you will have. Everything after it is either half a year's tax or half a year's tax adjusted for how the year went — never the full catch-up again, as long as you stay in the system.