Thousands of sole traders face a legitimate cash flow crisis every year that nobody warns them about beforehand. It is not a penalty. It is not an error. It is simply how HMRC’s system works.

The problem arrives in two forms: a balancing payment for last year’s tax, plus an advance payment toward this year’s tax. In January, these arrive simultaneously. Then on July 31st, the second half of this year’s advance payment falls due. If your profits have dropped compared to last year, you do not need to pay what HMRC estimates. But you must act before July 31st.

understanding your payments on account

For sole traders and landlords, self-assessment tax does not arrive as one lump sum in January. Instead, if your tax bill exceeds £1,000, HMRC asks you to pay it in two instalments. The first comes due on 31 January (alongside your balancing payment from the previous year). The second arrives on 31 July.

It can catch people out

Here is where the confusion starts. These payments are called “payments on account” because they are advance payments toward the tax year that is actually happening now. HMRC calculates them by taking your tax bill from last year, dividing it by two, and assuming you will owe roughly the same amount this year. Understanding all your ongoing tax filing requirements will help you plan your full compliance calendar for the year.

If your income was £50,000 last year and your tax was £5,000, your payments on account would be £2,500 each (January and July). HMRC assumes you will owe roughly £5,000 again next year.

But what if you will not?

When you can reduce your payment on account

If your profits this year are going to be lower than last year, you can ask HMRC to reduce your payment on account. This is perfectly legal and happens routinely. HMRC recognises that circumstances change; a quiet spell, unexpected illness, or a change of direction can all affect your income.

You can reduce your first payment (January) or your second payment (July), or both.

Take the Sevenoaks plumber. Last year she earned £60,000 and paid tax of £7,500. Her payments on account were therefore £3,750 each. But this year, due to quieter periods, she expects to earn only £40,000. Instead of paying £3,750 on July 31st, she could claim to pay perhaps £1,500, or even nothing if her profits drop significantly enough.

That could free up thousands of pounds in cash flow during a difficult period.

Timing is everything

You cannot simply reduce your July payment and sort it out later. You must contact HMRC and claim the reduction before the deadline passes.

If you miss the July 31st deadline, you will pay what HMRC expects. You can recover the overpayment later, when you submit your self-assessment return in January 2027, but the cash will have left your business. And that might have serious implications on your ability to pay other bills, invest in stock or even pay yourself.

For a small business facing a quiet period, missing this deadline could mean paying £3,000 in July when £800 would suffice. That is real money, particularly for a business managing cash flow.

The risk of claiming a reduction

There is a potential downside to claiming a reduction, though. If you claim to reduce your payment based on lower profits, but your year-end figures show you actually earned more than you forecast, HMRC will charge interest on the underpayment. The rates are not insignificant either; currently around 8% annually.

This is why getting your forecast right matters. Underestimating may make more sense than overestimating. You can always pay interest on a small underpayment, but you cannot recover thousands in overpaid cash during a lean period.

The pragmatic approach

If you genuinely expect a quieter year, claim the reduction. Contact HMRC online or use the HMRC app to request it. Include a brief explanation of why your profits will be lower; illness, reduced client work, or seasonal quietness are all acceptable reasons.

If you are uncertain about your year-end position, be conservative. It is better to pay something and recover an overpayment in January than to face interest charges and scrambling for cash in a lean period.

The deadline is July 31st, 2026. After that, you are locked into paying HMRC’s estimate. Contact us now if you want to discuss your position; we can help you estimate your year-end profits and advise whether a claim is worthwhile.

frequently asked questions about reducing payments on account

Can I reduce both my January and July payments?

Yes. If your profits are significantly lower, you can claim to reduce both payments. Many people only think about July, but January is a useful opportunity as well.

What if I get my forecast wrong and owe more than I expected?

HMRC will charge interest on the underpayment at around 8% per annum. This runs from the due date (July 31st) until you pay. If you underpay by £2,000, the interest might be £80 to £160 depending on how late you submit your return. Interest is often better than cash flow problems.

How do I apply for a reduction?

Contact HMRC directly via their online portal, by phone on 0300 200 3300, or in writing. You will need your tax reference and a brief explanation of why your profits are lower. HMRC usually responds within a few days.

Is there a minimum reduction I can claim?

No. Even small reductions are worth claiming if they reflect your actual forecast. Some people claim to reduce their payment by £300 or £400. The cash matters to your business.

About the author

Michelle Adams is a qualified accountant and director of Adams Accountancy, a friendly accountancy practice based in Dartford, Kent. With over 15 years of experience helping sole traders, landlords, and small business owners manage their tax and cash flow, Michelle specialises in making tax straightforward and stress-free. Adams Accountancy serves clients across Kent and beyond, with particular expertise in construction sector businesses. No question is too silly when it comes to understanding your taxes.

Contact Adams Accountancy on 01322 250001 or email info@adams-accountancy.co.uk for a free, no-obligation conversation about your payment on account or any other tax question.