On 31 July 2026, millions of self-employed business owners and directors will make their second payment on account 31 July for the 2025/26 tax year. Most will pay exactly what HMRC estimated — and a meaningful minority will overpay, sometimes by thousands of pounds, because their income has fallen but they have not applied to reduce the payment. The form takes 10 minutes. The deadline is rigid. Here is how to do it properly, and what happens if you do not.
What Payment on Account 31 July Actually Is
Payment on account is HMRC’s way of collecting tax in advance. If your Self Assessment bill for the previous tax year was over £1,000, and less than 80% of your tax was collected through PAYE at source, HMRC splits your estimated current-year bill into two payments. Each payment is 50% of the prior year’s total tax liability. The first is due 31 January (alongside any balancing payment from the prior year), the second is due 31 July. Full detail is on the gov.uk payments on account guidance.
The July 2026 payment is the second payment on account for the 2025/26 tax year. HMRC has estimated it based on your 2024/25 return. If your 2025/26 income is going to be similar, the payment on account will roughly match your final liability and will be credited against it. If your income has fallen, you are paying tax on money you never earned — and HMRC will eventually refund it, but only after you file your 2025/26 return in January 2027.
When You Can Apply to Reduce the Payment
You can apply to reduce your payment on account at any point if you genuinely expect your current-year income to be lower than the previous year. Common reasons include:
- Loss of a major client or contract
- Reduction in trading hours or business activity
- Early stages of maternity or paternity leave for self-employed parents
- Market downturn or sector-specific contraction
- Sale of a business or retirement midway through the year
- One-off capital gain in the previous year that will not recur
The application is made either on form SA303 by post, or online through your HMRC Self Assessment account. The online route is faster and typically processed within 72 hours. You give HMRC your revised estimate of total tax for the current year; they recalculate the payments on account at 50% of that estimate and apply the reduction to both the January and July payments (refunding any overpayment on the January payment).
The Risk of Reducing Too Aggressively
Reducing a payment on account is not a free option. If it turns out you reduced by more than was justified — because your final tax bill for 2025/26 ends up higher than your reduced estimate — HMRC charges interest on the underpaid amount. The interest rate is currently 7.75% per year (Bank of England base rate + 4 percentage points) and runs from the original payment date, not from when you filed the return.
For an SME owner who reduced their July 2026 payment from £8,000 down to £4,000, and then discovered in January 2027 that the full liability was actually £14,000 (meaning payments on account should have been £7,000 each), HMRC would charge interest on the £3,000 shortfall from 31 July 2026 to the date of payment. Over six months that is around £109. Not catastrophic — but it stings if you did not know it was coming.
The practical lesson: reduce based on evidence, not hope. If your Q1 and Q2 figures confirm a significant drop, reduce by the drop you can prove. If your income might recover in Q3 and Q4, reduce more cautiously or not at all.
The Interest and Penalty Clock If You Miss the Payment on Account 31 July Deadline
Payment on account has no ‘grace period’. If HMRC’s account has not received the funds by 31 July, interest starts accruing on 1 August at 7.75% per year (Bank of England base rate plus 4 percentage points), calculated on a simple daily basis. Unlike the Self Assessment deadline, there is no £100 fixed penalty for missing payment on account — but the interest clock is unforgiving.
| Amount Owed | Interest per Day | Interest After 30 Days | Interest After 90 Days |
|---|---|---|---|
| £3,000 | £0.60 | £17.87 | £53.62 |
| £8,000 | £1.59 | £47.67 | £143.01 |
| £15,000 | £2.98 | £89.38 | £268.14 |
| £30,000 | £5.96 | £178.77 | £536.28 |
If the payment remains unpaid when your 2025/26 Self Assessment becomes due in January 2027, HMRC then applies the Self Assessment penalty regime — initial 5% surcharge on the outstanding amount, rising to a further 5% after six months and another 5% after twelve months. Interest continues to accrue throughout.
Budget Payment Plans — the Better Cashflow Option
If 31 July sits awkwardly in your cashflow every year, HMRC offers a Budget Payment Plan — a weekly or monthly Direct Debit that lets you spread your payments on account across the year. The plan does not reduce what you owe, but it replaces two lumpy payments with predictable smaller ones. You set it up online through your HMRC account, choose your frequency and amount, and HMRC credits each payment against your next payment on account.
For a business owner with a £16,000 annual Self Assessment bill — £8,000 per payment on account — a weekly plan of £308 replaces the twice-yearly shock entirely. The payments are flexible: you can pause, adjust, or cancel at any time.
File Early to Know Your Exact Figure
The Self Assessment deadline is 31 January 2027, but you can file your 2025/26 return from 6 April 2026 onwards. Filing early gives you three advantages. First, you know your exact liability before the 31 July payment on account is due, so you can apply for a precise reduction if warranted. Second, any overpayment is refunded faster — HMRC typically processes refunds within 10 working days if there is no enquiry. Third, if you owe money, you still pay on 31 January but you have six months to plan the cashflow.
Common Mistakes
- Reducing the payment on account because cashflow is tight rather than because income has actually dropped — HMRC charges interest on the shortfall regardless of the reason
- Applying to reduce after 31 July — the application must be made before the deadline to reduce that payment; after the deadline, it only reduces the next one
- Forgetting that a one-off gain in the prior year inflates the payment on account — if you sold a rental property in 2024/25, your 2025/26 payments on account are calculated as if you will do it again, which you will not
- Assuming the payment on account includes Class 2 and Class 4 NIC correctly — Class 2 is treated separately and is not part of the payment on account calculation until the final balancing payment
- Paying to the wrong HMRC account — Self Assessment, PAYE, and VAT all have different reference numbers, and misdirected payments can take weeks to reallocate
Key Takeaways
- Check by mid-July whether your 2025/26 income genuinely warrants a reduction
- Apply online through your HMRC account — it is faster than form SA303
- Reduce based on evidence, not hope, to avoid 7.75% interest on any shortfall
- Consider a Budget Payment Plan to replace lumpy payments with weekly or monthly Direct Debits
- File your Self Assessment in April or May to know your exact figure before July
Next Steps for Your Business
If you think your 2025/26 income is materially lower than 2024/25, or you are not sure whether to reduce the July payment, a 30-minute personal tax planning session will model the options and file the reduction application for you if warranted. We handle the HMRC paperwork and confirm the new payment figure before 31 July.
Frequently Asked Questions
What is a payment on account and who has to pay it?
Payment on account is an advance instalment of your Self Assessment tax bill. If your previous tax year’s Self Assessment liability was over £1,000 and less than 80% of your tax was collected through PAYE, HMRC requires two payments — on 31 January and 31 July — each equal to 50% of the prior year’s total liability. It applies to most self-employed people, landlords, and directors taking significant dividend income.
How do I apply to reduce my payment on account?
The easiest way is through your HMRC online Self Assessment account — log in, select ‘reduce payments on account’, and enter your revised estimate of full-year tax. Alternatively, submit form SA303 by post. Online applications are usually processed within 72 hours; postal applications take 2–3 weeks. You can apply at any time, but the reduction only applies to payments not yet due.
What happens if I reduce too much and then owe more?
HMRC charges interest at 7.75% per year on any shortfall, calculated from the original payment date (31 January or 31 July) until the day you pay. There is no penalty — only interest — provided the shortfall is paid by the Self Assessment balancing payment deadline of 31 January. If it remains unpaid beyond then, the standard Self Assessment penalty regime applies.
Is there interest on late payment on account 31 July?
Yes. Interest accrues from 1 August at 7.75% per year, calculated as simple daily interest, on any amount unpaid after 31 July. There is no fixed £100 penalty at this stage — that only applies to late filing of the final Self Assessment return. However, if the amount remains unpaid when the final return is due, surcharges of 5%, plus another 5% at 6 and 12 months, are added.
Can I spread the payment across the year?
Yes. HMRC’s Budget Payment Plan allows you to pay weekly or monthly via Direct Debit. You choose the amount and frequency; HMRC credits each payment against your next payment on account. The plan does not reduce your total liability, but it smooths cashflow. You can pause or cancel it at any time without penalty.
Do I still have to pay if I have not filed my return yet?
Yes. Payment on account for 2025/26 is based on your 2024/25 return, not your 2025/26 return. The obligation to pay on 31 July 2026 exists whether or not you have filed your 2025/26 return. Filing early helps you plan the payment and apply for any reduction, but you cannot skip the payment just because the year is incomplete.
