A quick note before we begin.

This isn’t financial advice. I’m not an accountant.

Just a designer with a small freelance business in the UK who’s been caught out by this enough times to want it explained... properly, and simply.

I know this one’s a bit more technical. Possibly even a touch dull.

But it’s a sunny morning here in the UK, and I’m hoping that makes a newsletter about tax feel slightly less depressing.

There’s a TL;DR at the end if you’d rather skip to the gist. I wouldn’t blame you.

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Imagine this:

You’ve just finished dinner at a restaurant and paid the bill. You’re putting on your coat when the waiter brings over another one.

“Just a little something towards your next visit.”

You haven’t booked your next meal with them.

You’re not even sure when it’ll be, or what you'll eat.

But you still have to pay.

That’s the gist of Payments on Account: a bit of UK tax logic that kicks in once you’ve filed your personal tax return (Self Assessment), and calmly asks you to pay for a year you haven’t even lived through yet.

Now, I’m going to assume most of you are running your freelance design business in the UK through a limited company. There are plenty of good reasons to do that, of which I’ll come on to in another newsletter.

The money your business earns gets taxed in two main ways:

Your Limited Company pays corporation tax on its profits.

You, personally, pay tax on whatever you take out of your company to live on, typically as a small salary plus dividends. You might also pay National Insurance on the salary part, depending on how much you take.

That second part - your personal tax bill - is what we’re talking about here.

As a freelancer you'll probably pay yourself a bit of salary and the rest as dividends. That’s your personal income, and it’s what gets taxed through Self Assessment.

Ideally, you’ve got an accountant to help with all that. But regardless, it’s one of the many things that now falls to you as a freelancer.

And here’s the kicker.

Whatever your personal tax bill is for the year, HMRC will ask you to pay that same amount again in advance for the following year.

And they want half of it right now, and by the same deadline as the bit you were actually expecting to pay. Ouch.

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So, what actually is Payments on Account (POA)?

It’s HMRC’s way of getting a head start on next year’s Self Assessment tax if your current bill is big enough and hasn’t mostly been collected at source.

Think of it as HMRC slipping a second bill onto your table before you’ve even ordered dessert for next year. If last year’s tax tab was chunky enough, they’d like a down-payment on the sequel.

When does it apply?

You owe over £1,000 in Self Assessment tax after any tax already collected.

Less than 80% of that tax was collected via PAYE (or similar).

Hit both those marks and HMRC politely pre-charges you for next year with Payments on Account.

What do you have to pay?

By 31 January:

The tax you actually owe for the year you just filed.

Plus 50% again toward next year (1st POA).

By 31 July:

The second 50% (2nd POA).

Fast-forward twelve months

You file the next return.

HMRC tots up what you really owed.

They subtract the two POA chunks you already paid.

Overpaid? They refund or knock it off the following bill.

Underpaid? You settle the “balancing payment” by 31 Jan.

That final figure sets up the next pair of POA instalments – assuming you still clear the £1 000 / 80 % hurdles. And round we go again.

It kicks in automatically. Once those thresholds are hit, it rolls forward every year, quiet but persistent. And it has all the elegance of a Victorian ghost: silent, slightly spooky, impossible to ignore once it’s shown its face.

(Note: Capital gains, student-loan deductions, and Class 4 NIC for sole-traders don’t get the double payment treatment – POA only chases straightforward income tax.)

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Why does HMRC do this?

Because, honestly, they don’t want to wait 18 months to get your tax.

If you earned money in April 2025 and didn’t file your return until January 2027, that’s a long time for the government to go unpaid. So, instead of always being behind, Payments on Account is their way of pulling things slightly forward, by assuming your next year will look a lot like the last.

Other countries do it as well, for the same reason. But they tend to spread it out and flag it more clearly.

In the US it’s called Estimated Tax, and freelancers pay it quarterly.

In France, Germany, and across Europe, you also make advance payments, either monthly or quarterly, sometimes based on your own estimates, sometimes set by the tax office.

However, because it happens more frequently, it becomes part of the routine. You expect it. It’s just one of the rhythms of self-employment.

In the UK, it’s a yearly surprise, dropped in like a line item on a pub bill you don’t remember ordering. You’ve submitted your tax return. You’re expecting one number. And suddenly, there’s another one - same size, same deadline, just no one warned you.

It’s not that the tax itself is outrageous, It’s the surprise that stings. You’re not in trouble. It’s not hidden, it’s just rarely explained clearly unless someone walks you through it.

A good accountant will usually flag it during onboarding or when it first applies, but they might not remind you every year. And if you’re not using an accountant (not recommended), it’s really easy to miss entirely.

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So, rough numbers: what might this look like?

Let’s use some hypothetical income for a freelance designer:

Taking out around £40 - 50k per year to live on from your limited company

Trying to keep the majority of income under the higher dividend tax band

Using a mix of salary and dividends to stay tax-efficient in your personal situation

Your Self Assessment tax bill may be around £2,500 - £5,000 for the year, depending on your setup. But if Payments on Account kicks in, you’ll also be asked for half of next year’s tax now, and the other half in July.

Many design freelancers with a limited company use a salary of around £12,570 as part of their income, with the rest typically taken as dividends. It’s a figure that’s often recommended by accountants and has stayed fairly consistent in recent years. There’s a short explainer here if you want to understand why that’s become the norm.

The table below assumes £12,570 of income drawn is taken as salary (to reflect what many freelancers do). Figures are based on UK dividend tax bands for the 2025/26 tax year. Note that many advisers still set director salaries nearer the secondary NIC threshold (~£5 000 p.a.) to avoid employer NIC altogether, so check with your accountant if you're unsure.