Payments on Account Exemption: Who Does Not Need to Make Payments on Account?

A payments on account exemption applies where a Self Assessment taxpayer does not meet HMRC’s conditions for making advance Income Tax payments. Although many self-employed individuals, landlords and other taxpayers pay tax in two instalments each year, not everyone is required to do so.

Understanding whether you qualify for an exemption is important because it can prevent unnecessary tax payments and improve cash flow. Equally, assuming you are exempt when HMRC’s rules still apply could result in late payment interest or an unexpected balancing payment.

This guide explains who does not pay payments on account, the current HMRC payments on account rules, the payments on account threshold, and the situations where you may be able to reduce or stop future payments altogether. For a broader understanding of how payments on account fit into the UK personal tax system as a whole, our ultimate guide to personal tax in the UK covers income tax, reliefs and reporting obligations in more depth.

What Are Payments on Account?

Payments on account are advance payments towards your future Self Assessment Income Tax bill. Rather than paying the whole amount after submitting your tax return, HMRC asks many taxpayers to pay part of their expected liability in advance.

The system mainly affects taxpayers whose Income Tax is not fully collected through PAYE or another deduction-at-source arrangement. This commonly includes sole traders, landlords, business partners and individuals receiving significant untaxed income.

Each payment is normally calculated as 50% of the previous year’s relevant Income Tax and Class 4 National Insurance liability. These advance payments are then credited against your final Self Assessment calculation once your tax return has been submitted.

When Are Payments on Account Due?

Under the current Self Assessment timetable:

The first payment on account is due by 31 January, the second payment is due by 31 July, and any balancing payment becomes payable on the following 31 January once your actual tax liability has been calculated.

For example, during the 2026/27 cycle:

• 31 July 2026 – Second payment on account for 2025/26.
• 31 January 2027 – Balancing payment for 2025/26 and first payment on account for 2026/27.
• 31 July 2027 – Second payment on account for 2026/27.

If your circumstances have changed since the January instalment, it’s worth checking whether you can reduce your 31 July tax payment on account before that deadline arrives.

The January payment often appears larger than expected because it may include both the balancing payment for the previous tax year and the first payment towards the following year.

Who Does Not Pay Payments on Account?

Many taxpayers assume that everyone completing a Self Assessment return must make payments on account. In reality, HMRC only requires advance payments when certain conditions are met.

Most people qualify for a payments on account exemption because their previous year’s tax position falls outside HMRC’s requirements.

Your Previous Year’s Relevant Tax Liability Was Less Than £1,000

The most common exemption applies where your relevant Self Assessment liability for the previous tax year was less than £1,000.

This is often referred to as the payments on account threshold. If your qualifying liability remains below this level, HMRC will usually require payment only after your tax return has been completed rather than through advance instalments.

It is important to understand that the £1,000 test does not simply refer to the overall amount shown on your Self Assessment statement. HMRC uses a specific calculation that mainly includes Income Tax and Class 4 National Insurance after taking account of tax already deducted at source.

More Than 80% of Your Tax Was Already Collected

You will also normally qualify for an exemption where at least 80% of your total Income Tax liability has already been collected before your Self Assessment bill is calculated.

This commonly applies to employees whose income is taxed through PAYE throughout the year. Although they may still complete a Self Assessment return because of rental income, dividends or other circumstances, sufficient tax has already been collected through payroll to remove the need for advance payments.

The 80% test means HMRC is unlikely to require further advance payments where only a relatively small balance remains payable through Self Assessment.

You No Longer Have the Income That Created the Original Payments

Some taxpayers become exempt because the income that originally triggered payments on account no longer exists.

For example, you may have:

ceased self-employment, sold a rental property, retired, stopped receiving foreign income or experienced a significant reduction in taxable profits.

In these situations, HMRC will not automatically remove the payments. Instead, you normally need to submit a claim showing why your expected tax liability is now lower.

HMRC Payments on Account Rules Explained

The HMRC payments on account rules are designed to collect tax gradually where a taxpayer regularly owes Income Tax through Self Assessment.

Rather than waiting until after the tax year has ended, HMRC collects part of the expected liability in advance using the previous year’s tax calculation as the starting point.

This approach generally works well where income remains relatively stable from one year to the next. However, it can become less accurate when profits fall, businesses close or income sources change significantly.

That is why HMRC allows taxpayers to reduce their payments where they have reasonable grounds to believe their liability will be lower.

Payments on Account Are Not an Additional Tax

A common misunderstanding is that payments on account represent an extra tax charge.

In reality, they are simply advance payments towards your future Self Assessment liability. When your tax return is completed, HMRC deducts the instalments already paid before calculating whether you owe additional tax or are due a repayment.

Can You Become Exempt During the Year?

Yes. A taxpayer who originally needed to make payments on account can become exempt if their expected liability falls below HMRC’s requirements.

This often happens where business income declines, employment income replaces self-employment income, rental profits reduce substantially or a business ceases trading.

Where this occurs, you may be able to reduce or even cancel the remaining payments on account by submitting a claim through your HMRC online account or by completing form SA303.

The claim should be based on a realistic estimate of your expected tax liability rather than a temporary cash-flow problem.

How to Check Whether You Qualify for a Payments on Account Exemption

Before assuming that payments no longer apply, it is worth reviewing your latest Self Assessment calculation together with your expected income for the current tax year.

Ask yourself:

• Was my relevant Self Assessment liability below £1,000?
• Was more than 80% of my tax already collected through PAYE or another deduction-at-source method?
• Have my taxable profits reduced significantly?
• Has a major source of taxable income ended?
• Am I expecting substantially lower Income Tax this year than last year?

If the answer to one or more of these questions is yes, it may be appropriate to review whether your payments on account should be reduced or removed.

Can You Reduce or Cancel Payments on Account?

Although there is no automatic cancellation process, HMRC allows taxpayers to reduce their advance payments where there are reasonable grounds for believing the current year’s liability will be lower.

The request can usually be made through your HMRC online account or by submitting form SA303.

There is no limit to the number of genuine adjustments that may be made if your expected liability changes during the year.

When a Reduction Is Usually Appropriate

A reduction is commonly appropriate where profits have fallen, a business has ceased trading, rental income has reduced, more tax is deducted through PAYE or a significant source of untaxed income has ended.

The revised amount should always be supported by a reasonable tax estimate based on current records rather than an assumption that income will simply be lower.

What Happens If You Reduce Payments Too Much?

Reducing your payments on account without reasonable grounds can create problems later.

If your completed tax return shows that the payments should have been higher, HMRC can charge late payment interest on the difference from the original payment dates.

Where a claim is made carelessly, negligently or fraudulently, HMRC may also consider charging penalties in addition to interest.

For this reason, any reduction should be based on current bookkeeping records, realistic profit forecasts and all expected sources of taxable income. If you’re struggling to fund your July tax payment regardless of whether a genuine reduction applies, it’s worth reviewing the payment support options available rather than submitting an unsupported claim.

Common Situations Where Taxpayers Incorrectly Assume They Are Exempt

Many payment problems arise because taxpayers misunderstand how the exemption rules work rather than because the rules themselves are particularly complicated.

Employees With Rental Income

An employee may assume PAYE means payments on account never apply. However, if rental income or other untaxed income creates a sufficiently large Self Assessment liability, advance payments may still be required.

Businesses With Lower Turnover

A fall in turnover does not automatically mean the tax liability will also fall below the exemption threshold. Tax is based on taxable profit rather than gross income.

New Sole Traders

Many new business owners are surprised when payments on account first arise because the January payment often includes both the balancing payment for the completed year and the first payment towards the following year. This is one of the main reasons why you should maintain a tax reserve from an early stage, rather than only saving to pay tax once the first combined bill has already arrived.

Taxpayers Receiving One-Off Income

A one-off source of taxable income may create payments on account that no longer reflect future tax liabilities. In these cases, a reduction claim may be appropriate once the income has ceased.

Making Tax Digital and Payments on Account

Making Tax Digital for Income Tax became mandatory from 6 April 2026 for qualifying sole traders and landlords within the first implementation phase.

Although digital record keeping and quarterly updates are changing how many taxpayers report income to HMRC, they do not replace the existing payments-on-account system.

Taxpayers affected by Making Tax Digital may therefore still qualify for a payments on account exemption if they satisfy HMRC’s existing rules.

Payments on Account Exemption Case Study

Emma, a part-time consultant, visited our Wimbledon office after receiving a Self Assessment statement showing another payment on account due. During the year, she had reduced her consultancy work and taken a full-time PAYE position, so she assumed the advance tax payments no longer applied. However, she was unsure whether she qualified for a payments on account exemption.

After reviewing her latest tax calculation, we explained that HMRC payments on account rules only require advance payments when certain conditions are met. Because most of Emma’s Income Tax was now being collected through PAYE and her remaining Self Assessment liability was expected to fall below the payments on account threshold, we discussed whether a reduction or exemption was appropriate based on her updated circumstances.

As we reviewed her records, Emma also asked whether HMRC would automatically stop requesting future instalments. We explained that taxpayers whose circumstances change should review their Self Assessment position and, where appropriate, submit a supported claim to reduce or cancel future payments rather than assuming HMRC will update the account automatically.

By the end of the meeting, Emma understood that who does not pay payments on account depends on their current tax position rather than their previous year’s bill. Keeping accurate records, monitoring changes in income and reviewing tax liabilities each year can help ensure that payments on account reflect actual circumstances and avoid unnecessary advance tax payments.

Find Out Whether You Qualify for a Payments on Account Exemption With Cigma Accounting in London

Understanding the Payments on account exemption rules can help you determine whether you’re required to make advance Self Assessment tax payments. Cigma Accounting supports clients across the Farringdon, including individuals and businesses in Aldgate and Bank, helping taxpayers understand when payments on account apply and whether they qualify for an exemption under HMRC rules.

Not everyone is required to make payments on account. Knowing who does not pay payments on account, understanding the HMRC payments on account rules, and checking whether you fall below the payments on account threshold can help you avoid unnecessary payments and better plan your future tax obligations.