How to reduce payments on account when your income drops

Last year was good. This year, a regular client has disappeared, you have cut your working hours or the jobs coming in are smaller.

Then you look at your HMRC account. The next tax payment still seems to assume that business is booming.

That mismatch can happen because payments on account use your previous tax bill as a starting point. If this year’s position is different, you may be able to change the advance payments too.

You can ask HMRC to reduce payments on account if you expect the relevant tax liability to be lower. Start with a realistic forecast, then apply online or using form SA303. Reducing too far can lead to interest, so the forecast matters as much as the application.

Why last year can set the next payment

Payments on account are advance instalments towards your next Self Assessment bill, including Class 4 National Insurance where applicable. Each is usually half the previous year’s relevant bill, with payment dates of 31 January and 31 July.

They are credited towards the year’s liability. Any remaining balance is dealt with when the year’s actual bill is worked out.

Check your Self Assessment statement to see whether payments on account apply and which tax year they cover. HMRC’s payments on account guide explains the calculation and exceptions.

For the wider picture, our guide to sole trader taxes in the UK explains how business profit fits into your tax position.

When asking HMRC for a reduction makes sense

You might expect a lower bill because you have lost work, taken time away or had higher allowable business costs. HMRC also recognises increased tax relief and a greater amount of tax collected at source as possible reasons for reducing payments on account.

But a quieter month does not automatically mean a lower annual bill. An unpaid invoice might explain a tight bank balance while the rest of your year’s work still supports a similar tax liability.

Ask: what do I reasonably expect the whole tax year to look like?

HMRC sets out the grounds for applying in its guidance on reducing payments on account.

A lower income example in pounds

Imagine the relevant 2025/26 tax liability used to calculate your payments on account is £4,800. HMRC therefore sets two £2,400 instalments towards 2026/27.

You review your work and expenses for 2026/27 and reasonably estimate the corresponding liability will be £3,000 instead.

In this simplified example, the reduction leaves £900 less to pay at each instalment date: £1,800 across the two payments.

It does not cancel tax already owed for 2025/26. Any balancing payment for that earlier year remains separate. The £3,000 is an illustrative forecast of the relevant liability, not a tax calculation based on a particular turnover or profit.

Build a forecast you can explain

Start with your bookkeeping, then look ahead to 5 April, when the tax year ends.

Bring together income and allowable expenses recorded so far, expected work for the remaining months and costs you reasonably expect to incur. Account for the timing rules of your accounting method rather than treating every invoice as money already received.

Then consider the rest of your tax position. Rental income, employment income, tax already deducted and reliefs can affect the result. Losing freelance income while gaining income elsewhere may not reduce the amount you need to pay by as much as you expect.

HMRC’s guidance on claims to adjust payments on account makes clear that the estimate must consider the relevant liability across income sources.

Keep a short record of how you reached your figure: work lost, revised bookings, updated costs and the calculation. It gives you something useful to revisit if business picks up.

If you are still sorting out the costs side, use our sole trader expenses checklist to spot missing records.

How to reduce payments on account online

Once you have worked out the revised figure:

1. Sign in through HMRC’s official online service.
2. Open your latest Self Assessment return.
3. Select Reduce payments on account.
4. Follow the instructions and provide the requested estimate and explanation.
5. Save the confirmation and check the revised statement before arranging payment.

You can also apply by post using form SA303. An authorised tax agent can make a claim on your behalf.

Use the application links on HMRC’s official reduction page. Be clear about the tax year you are changing; a payment’s calendar date and the tax year it relates to are not the same thing.

What happens if you reduce them too much?

Suppose you reduce the two instalments to £1,500 each, as in the example above. Business then improves and the actual relevant liability turns out to be £3,600.

That leaves a £600 shortfall. Interest can apply to the underpaid instalment amounts from their original due dates, even if you settle the difference by the later balancing payment deadline. The precise calculation depends on the final liability and payment history; HMRC gives examples in its guidance on late payment interest.

Revisit the forecast when circumstances change. HMRC allows claims to adjust payments upwards as well as downwards. Getting a new long-term client is a good reason to check your estimate again.

If the problem is finding the money to pay

Sometimes the tax estimate is right and the cash is simply not there.

Reducing payments on account is designed to reflect a lower expected liability. If the amount is still due but you cannot pay it in full, look at HMRC’s payment plan options instead. A Time to Pay arrangement may be available, depending on your circumstances.

Frequently asked questions

Can I reduce payments on account to zero?

Potentially, if a reasonable estimate shows no relevant liability remains to be covered by them, for example because tax deducted at source covers it. Stopping self-employment alone does not establish that; other income and tax still need checking.

Does a reduction lower my final tax bill?

It changes the advance instalments. Your final liability is worked out from the actual year’s circumstances. Any shortfall still has to be paid, with interest where applicable.

Can I reduce payments on account because one month was quiet?

A quiet month is a reason to review your forecast. The application needs to reflect what you reasonably expect for the whole tax year, including other relevant income, costs and tax already collected.

Make the decision while the figures are fresh

Reviewing payments on account is much easier when you can see what the business has actually brought in and spent.

Kletta helps you keep income, expenses and receipts organised throughout the year. Those records give you and your adviser a clearer starting point for a forecast; the HMRC reduction request remains a separate step.

Explore Kletta for sole traders, or see how Self Assessment software helps keep your tax records organised.