Every self-employed person and most landlords in the self-assessment system faces a payment to HMRC on 31 July, and it is the most misunderstood date in the tax calendar. This is the second "payment on account" — an instalment towards the 2025/26 tax year, calculated automatically as half of your previous year's tax bill. The system assumes this year will look like last year. For a great many people it will not, and that mismatch is where money gets needlessly handed over and then slowly clawed back. With the deadline now weeks away, the summer is the window to act rather than pay on autopilot.
The mechanics catch people out because the bill bears no relation to your current trading. If you earned well in 2024/25 and your tax came to £6,000, HMRC will ask for £3,000 each on 31 January and 31 July as payments on account towards 2025/26 — regardless of whether your income this year has fallen off a cliff. Pay it without thinking and you are funding HMRC ahead of time on profits you may never make. There is a legitimate, built-in remedy, and surprisingly few people use it.
You can apply to reduce your payments on account
If you have good reason to believe your 2025/26 income will be lower than 2024/25 — a lost contract, reduced hours, a property sold, a business wound down — you can ask HMRC to reduce both payments on account using form SA303 or directly through your online tax account. Reduce the July instalment to match your realistic expected liability and you keep that cash in your own account through the summer rather than HMRC's. The discipline is honesty: if you cut the payment too far and your income holds up, HMRC charges interest on the shortfall, currently running at a rate pegged above the 3.75% base rate. Estimate carefully, lean slightly cautious, and the reduction is a clean win.
The interest clock that punishes a late payment
Miss the 31 July deadline and HMRC applies late-payment interest from the day after, day by day, until you pay. There is no soft grace period on payments on account the way there is a fixed penalty structure on the filing deadline. With interest charged at base rate plus a margin, a £3,000 instalment left unpaid for two months costs real money for no benefit. If cash is genuinely tight, the right move is not to ignore it — it is to set up a Time to Pay arrangement with HMRC before the deadline, which spreads the bill and is far cheaper and calmer than letting interest accrue on a missed payment.
While you are in the account, check the allowances you are not using
The summer payment is also a natural prompt to look at the reliefs that quietly reduce the underlying bill the payments on account are based on. The £1,000 trading allowance covers small side-hustle income tax-free. Pension contributions extract higher-rate relief and shrink taxable profit. For a sole trader, every legitimate expense not claimed — use of home, mileage, professional subscriptions, equipment — inflates the profit figure that next year's payments on account are built on. Cutting this year's taxable profit does not just save tax once; it lowers the instalments HMRC demands next January and July too. The effect compounds.
Making Tax Digital changes the rhythm from here
For sole traders and landlords now inside Making Tax Digital for Income Tax, the era of doing all of this once a year is ending. Quarterly updates mean your real-time profit position is visible far earlier, which in turn makes the payment-on-account guesswork less of a shot in the dark — you can see by the second quarter whether your income is tracking ahead of or behind last year and adjust accordingly. The taxpayers who will struggle are the ones still treating tax as a January scramble. The ones who treat the 31 July payment as a checkpoint, not a shock, are the ones who keep their own money working for as long as the rules allow.