If you’re self-employed or a company director taking dividends, you’ll probably be familiar with the 31st July Payment on Account deadline. This isn’t your final tax bill for the year that’s just finished. It’s a “Payment on Account” (POA), which is essentially 50% of your current year’s tax bill, paid in advance.
For many business owners, this can feel frustrating. After all, you’re making a payment towards next year’s tax bill before the tax year has even finished. If business has slowed down, you may be wondering whether you can reduce your Payment on Account. In some cases, the answer is yes. However, reducing it without a realistic forecast could leave you with an unexpected tax bill and interest charges further down the line.
Here’s what you need to know before making a decision.
How Do Payments on Account Work?
Payments on Account are advance payments towards your next Income Tax bill, these are due on:
- 31st January: Payment for the previous tax year (balancing payment) plus your first Payment on Account for the current year.
- 31st July: Second Payment on Account for the current year.
- The following January: Your final balancing payment once the actual tax bill is calculated.
When your tax return is submitted, your actual tax liability is calculated. If you’ve paid too much, you’ll usually receive a refund or have the overpayment offset against future tax. If you’ve paid too little, you’ll face a bigger bill in January and need to pay the difference.
This is why reducing your POA can seem attractive, but it’s also where people make expensive mistakes.
Can You Reduce Your Payment on Account?
Yes, you can legitimately reduce your POA but only if you can show your tax bill for the current year will significantly be lower than the previous year.
Valid reasons include:
- You’ve lost a major client and your income has reduced significantly.
- You’ve stopped trading or sold your business.
- You’ve moved from self-employed to PAYE employment.
- You’ve taken a sabbatical or unpaid leave
- Your business has experienced a sustained reduction in profits.
A quieter month or one disappointing quarter doesn’t necessarily mean your overall tax liability will be lower. The key is having evidence to support your estimate.
Why It’s Important to Get the Figures Right
Reducing your Payment on Account may improve short-term cash flow, but it can also create problems if your estimate turns out to be too low.
Say you reduce your POA based on a projection, then the tax year finishes differently than expected. Maybe you picked up new clients by September, a big project came through, or you miscalculated your projection. Now your actual tax bill is higher than the reduced payments you made. HMRC will demand the shortfall, plus a late payment interest at approximately 7.75% per annum, calculated from the date the original payment was due.
If your profits recover later in the year, or your income is higher than expected, you may find yourself with:
- A larger balancing payment.
- Interest charged on the underpaid amount.
- Less time to prepare for the additional tax due.
If you underpay by £5,000 for six months, you’re paying roughly £188 in interest alone. Over a year, it’s nearly £400. So that “saving” of £2,500 on your July payment just cost you £400+ in interest, plus the stress of a surprise bill. Not good.
While reducing your payment can be the right decision, it should be based on realistic financial information rather than optimism.
Base Your Decision on Current Financial Data
Our advice? Don’t reduce your Payment on Account based on a hopeful forecast.
Instead, use your actual trading figures from April to June to help project the rest of the tax year. Even then, it’s worth taking a cautious approach. If your estimate proves to be wrong, it’s generally better to have slightly overpaid and receive a refund than to underpay and face interest charges later.
Most accountants won’t recommend reducing a Payment on Account without up-to-date trading data to support the decision. We’d much rather see you reclaim an overpayment after your tax return is submitted than leave yourself with an unexpected bill and interest because your estimate was too optimistic.
Keep Evidence to Support Your Decision
If you choose to reduce your Payment on Account, it’s sensible to keep records showing how you reached that decision.
This might include:
- Your trading accounts for April – June
- Evidence of client contracts you’ve lost
- Changes to your business structure or income.
Should HMRC ever ask why the payment was reduced, you’ll have clear documentation to support your position.
Planning Ahead Makes Tax Easier
Payments on Account can feel frustrating, particularly if cash flow is tight. However, reviewing your financial position before the deadline allows you to make informed decisions rather than reacting at the last minute.
Good forecasting, accurate bookkeeping, and regular tax planning can help avoid unexpected liabilities and make future tax payments much easier to manage.
If you’re considering reducing your July Payment on Account, it’s worth reviewing your numbers before making a decision.
At BW Business Accountants & Advisers, we help businesses forecast tax liabilities, review year-to-date trading performance, improve cash flow planning and prepare for upcoming tax payments with confidence. By using accurate financial information, you can make informed decisions that support your business without creating unnecessary tax surprises. See what services and packages we provide here.
Need more advice on managing your finances? Read our post on how to avoid the VAT timing trap.
Disclaimer: The information mentioned in this blog was correct at the time of posting (July 2026) and has not been updated for any future changes in tax law or HMRC practice. The contents of this blog has been produced as a helpful reference point, and the information provided should be used as a guide only. You should discuss your specific circumstances directly with us before taking any action based on the information included in this blog.