Why HMRC Wants More Money in July

July. The diary's full, the weather's acceptable for once, and there's a number on your HMRC account that wasn't there six months ago.

If you paid your Self Assessment bill in January and a second payment is now showing up for 31 July, it's not an error and it's not a penalty. It's called a payment on account. Once you understand how it works, it stops being a nasty surprise every summer.

What payments on account actually are

HMRC collects tax from self-employed people twice a year: 31 January and 31 July.

The January payment covers two things at once: what you owed for the year just gone, and the first instalment toward the year you're currently in. July is the second instalment.

So when you paid in January, part of that money was already earmarked for this year's tax, not last year's. You're not being charged again for the same income. You're pre-paying next year's bill in two halves.

HMRC does this because sole traders don't have tax deducted at source. Without a system like this, the whole year's tax lands in one go every January, which is worse for everyone.

Who this applies to

Payments on account kick in when your Self Assessment bill exceeds £1,000 and less than 80% of your income has already had tax collected through PAYE.

If you're a sole trader with no employed income on the side, and you're generating a reasonable profit, you're almost certainly in the system.

How the amount is calculated

Each payment on account is half of your previous year's tax bill.

If your 2024/25 bill was £3,600, HMRC wants £1,800 in January 2026 and £1,800 in July 2026. When your 2025/26 accounts are filed, whatever you actually owe for that year is settled against what you've already paid. You pay the difference, or you get a credit.

The catch: if your income has grown, those advance payments won't cover the full bill, and January becomes a bigger number than expected.

If this year's earnings were lower

You can apply to reduce your payments on account.

If you've had a quieter year — a slow patch, a break, a change in work — it's worth telling HMRC. You pay the reduced amount, and if you undershoot, HMRC charges interest on the difference. The interest is usually modest. The cash flow benefit of not overpaying is usually worth it.

The process is straightforward: your accountant can do it, or you can do it yourself through the Self Assessment portal.

What you shouldn't do is just not pay and assume it'll sort itself out. That attracts penalties and interest, and it never sorts itself out.

Getting ahead of the next one

The July payment catches people because it isn't mentioned in the January paperwork — or if it is, it's buried. By the time July arrives, January feels like a long time ago.

The fix is boring but effective: take your previous year's total tax bill, divide by twelve, and set that amount aside each month into a separate account. Treat it as not yours. By January you've covered the bill and half of July. By July you've covered July.

It won't match exactly — the actual amounts shift as your income changes — but you'll stop being ambushed.

KP Accountants works with sole traders and small businesses across Cornwall on a set fee. If you want to know exactly what you owe and when, get in touch.