A brown envelope lands in June reminding you that HMRC wants more money by 31 July, even though you only paid a tax bill in January. If that sounds familiar, you have met payments on account, the system that catches almost every sole trader, landlord, and contractor by surprise in their first year or two of self assessment. Here is how the July instalment works, who has to pay it, and the legitimate ways to reduce it.

How payments on account work

Think of them as advance instalments towards your next self assessment bill. HMRC assumes you will owe roughly the same as last year, so it asks for two payments of 50% each: one by 31 January and one by 31 July. The GOV.UK explanation of payments on account confirms the rule: they apply when your last bill was over £1,000, unless at least 80% of your tax was collected at source through PAYE.

The payment due on 31 July 2026 is the second instalment towards your 2025-26 tax year. When you file the 2025-26 return, HMRC compares what you actually owe against the two instalments already paid. Any shortfall becomes a balancing payment due 31 January 2027, and any overpayment is refunded.

A worked example helps. Suppose your 2024-25 bill was £4,000. HMRC asks for £2,000 by 31 January 2026 and £2,000 by 31 July 2026 towards 2025-26. If the 2025-26 return later shows you owe £5,000, the remaining £1,000 falls due on 31 January 2027 alongside the first instalment for the following year.

The system trips people up most in their first year of trading. The January bill includes the whole of last year’s tax plus a 50% payment on account for the current year, then another 50% arrives six months later. In effect you pay 18 months of tax in seven months, which is why we tell new clients to put money aside from day one.

Who has to make the 31 July payment

Anyone whose 2024-25 self assessment bill came to more than £1,000 and was not mostly covered by PAYE deductions will have a July instalment, which covers Class 4 National Insurance as well as income tax. That includes sole traders, partners, and most landlords with meaningful rental profits. Our landlords accounts service spends a fair amount of every June helping property owners check whether the demanded figure still reflects reality.

CIS subcontractors are the big exception in practice. Because 20% tax is deducted from their pay before they receive it, many are due refunds rather than further instalments. If you work under the Construction Industry Scheme and have received a payment on account demand, it is worth a second look before paying, and our CIS refunds team can tell you quickly whether the demand is right.

Reducing your payments on account legitimately

If your 2025-26 profits were lower than the year before, you can apply to reduce the instalments to match your genuine expected bill. The claim is made online through your personal tax account, on form SA303, or simply by entering reduced figures when your return is filed. There is no charge for making the claim.

Accuracy matters here. Reduce the instalments below what you eventually owe and HMRC charges late payment interest, currently set at the Bank of England base rate plus 4 percentage points, backdated to the original due dates. Reduce them honestly to a realistic figure and you keep cash in the business without penalty. This is one decision where ten minutes with real numbers beats optimism.

The cleanest route of all is filing the 2025-26 return before 31 July 2026. The return replaces HMRC’s estimate with your actual liability, so the July instalment adjusts automatically, and any refund due starts moving sooner. Our taxation team in Widnes prepares early returns through June for exactly this reason.

Budgeting for July without the scramble

The instalment system rewards people who treat tax as a monthly cost rather than a twice-yearly shock. Divide last year’s bill by twelve and move that amount into a separate account every month, and the July payment becomes a simple transfer rather than a crisis. Many of our clients use a dedicated savings account that earns a little interest while the money waits.

Self-employed income rarely arrives evenly, so a percentage method works better for some. Setting aside 25% to 30% of each invoice as it is paid usually covers income tax, Class 4 National Insurance, and the instalments with a small buffer to spare. Landlords with mortgaged properties may need a higher rate, because the tax relief on finance costs is restricted to the basic rate of 20%.

A quick mid-year review keeps the plan honest. Comparing the tax pot against the next two known payments each quarter shows whether the savings rate needs adjusting, long before a deadline forces the issue. Ten minutes with the figures in June and again in October is usually enough.

What happens if you cannot pay by 31 July

Interest starts the day after the deadline, but there is no separate late payment penalty on a missed payment on account, only on balancing payments. If cash flow is genuinely tight, HMRC’s Time to Pay service lets you set up a payment plan for a self assessment bill online in many cases, spreading the cost over agreed monthly instalments.

Setting up the plan before 31 July, rather than after, keeps the account clean and avoids the awkward conversation where arrears have already built up.

Ignoring the demand is the one option that never works. The debt sits on your statement gathering interest and collides with the January balancing payment, turning a manageable instalment into a genuinely difficult bill. Speaking to HMRC, or asking us to do it on your behalf, almost always produces a workable arrangement.

Frequently Asked Questions

Check the figure before you pay it

The 31 July 2026 instalment does not have to be paid blind. Check the figure, reduce it if your profits genuinely fell, or file early and let the real numbers take over. If you would like the statement reviewed before the deadline, get in touch with FD Accountants for a free initial consultation in plain English.