Why the January tax bill can be bigger than last year’s tax

The first time it happens, it can feel like a mistake. You file your tax return in January, the calculation shows a bill you were roughly expecting, and then the amount due is half as much again. Nothing has gone wrong. You have met payments on account, the system HMRC uses to collect Self Assessment tax in instalments rather than all at once after the year has ended.

Self Assessment covers anyone whose tax is not fully collected through PAYE: the self-employed, landlords, people with larger investment income and some pensioners whose income comes from several sources. The rules are the same for all of them.

The dates that matter for 2025/26

The 2025/26 tax year ran from 6 April 2025 to 5 April 2026. GOV.UK sets out the deadlines for that year’s return:

The option to pay through your tax code generally applies to smaller amounts owed by people who also have PAYE income, such as a pension or a salary.

What payments on account are

Payments on account are two advance payments towards the current year’s tax. Each one is normally half of the previous year’s Self Assessment bill. They are due on 31 January and 31 July. When the year ends and you file your return, any difference is settled the following 31 January as a balancing payment, or refunded if you paid too much. For the self-employed, payments on account include Class 4 National Insurance.

Why the first year feels expensive

Illustrative example: the first year

David starts letting a flat in 2025/26. His return shows a bill of £2,400 for that year. He has made no payments on account before. Invented figures.

Tax for 2025/26£2,400

First payment on account for 2026/27 (half of £2,400)+ £1,200

Due 31 January 2027£3,600

Second payment on account, due 31 July 2027£1,200

Illustration only. It assumes David’s bill is over £1,000 and less than 80% of his tax was collected at source.

The £3,600 is not extra tax. £1,200 of it is an advance on 2026/27, which will be credited when that year’s return is calculated. But the cash leaves your account in January either way, so it helps to know in advance.

How it settles down in later years

Once payments on account are running, the January bill is usually much closer to one year’s tax. GOV.UK uses this pattern in its own example. Here it is with invented figures for the current cycle:

When income is steady, January and July end up roughly even. When income rises, January carries the catch-up as well as the next advance.

When you do not need to make them

GOV.UK lists two situations where payments on account do not apply:

• your last Self Assessment bill was less than £1,000; or
• more than 80% of last year’s tax was already deducted at source, for example through your tax code on a pension or salary, or from savings interest.

That is why many pensioners who file a return only because of a modest extra income never see payments on account at all.

Reducing payments on account

If you expect this year’s tax to be lower, for example because you have retired, sold a rental property or had a quieter year in business, you can ask to reduce your payments on account. This can be done in your online account or by sending form SA303, and you need to give the amount you expect to owe. If you reduce them and the final bill turns out higher, HMRC charges interest on the difference, so it is worth being realistic rather than hopeful.

If the deadline is missed

For returns filed under the current Self Assessment rules, GOV.UK lists these penalties:

• £100 if the return is up to three months late;
• after three months, £10 a day for up to 90 days, so up to £900;
• after six months, a further 5% of the tax due or £300, whichever is greater, and the same again after twelve months;
• for paying late, 5% of the unpaid tax at 30 days, six months and twelve months.

Interest is also charged on tax paid late, at the Bank of England base rate plus 4 percentage points since 6 April 2025. If you cannot pay in full, you may be able to set up a payment plan online if you owe £30,000 or less, have filed your returns and have no other plans or tax debts; otherwise HMRC’s payment helpline is on 0300 123 1813.

A change on the way

Making Tax Digital for Income Tax began on 6 April 2026 for sole traders and landlords with qualifying income over £50,000, and is due to extend to those over £30,000 from April 2027. It brings quarterly updates and a different penalty system, which applies from the tax year you join.

Who this matters for, and what to check

• Anyone filing for the first time, or whose income rose sharply in 2025/26: expect a larger January payment.
• People whose income will fall in 2026/27, such as new retirees: consider whether reducing payments on account makes sense.
• Pensioners taking larger pension withdrawals: these count as income on the return. See how the taxable part of a pension is taxed.
• Anyone helping family with money: gifts are not taxable income, but our guide to everyday gift exemptions covers the inheritance tax side.