I opened the HMRC calculation, saw a number I had expected, felt fine about it, and then read the line underneath. The number I actually had to pay by 31 January was half as much again.
Nobody had told me. I had been freelancing for fourteen months, I had put money aside, I had read the guidance, and I still got it wrong, because the thing I got wrong is not on the first page of the guidance. It is on the second.
This is what happened, in pounds, and the three rules I would give myself if I could go back.
The mistake: your first January bill is 150% of your tax
Here is the arithmetic on a profit of £38,000, which is roughly where I was.
| Line | Amount |
|---|---|
| Profit for the year | £38,000.00 |
| Income tax at 20% on £25,430 above the allowance | £5,086.00 |
| Class 4 National Insurance at 6% on the same band | £1,525.80 |
| Class 2 National Insurance | £0.00 |
| Tax owed for the year | £6,611.80 |
| First payment on account, due the same day | £3,305.90 |
| Total due 31 January | £9,917.70 |
| Second payment on account, due 31 July | £3,305.90 |
The £6,611.80 is the bill. The £9,917.70 is what leaves your account.
Why HMRC does this, in one paragraph
It is called a payment on account, and it is not a penalty or a mistake. HMRC assumes next year will look like this year and asks you to pay it in two instalments in advance, one on 31 January alongside the balance for the year just gone, one on 31 July. Each instalment is half of last year’s bill.
Two things switch it off. You do not make payments on account if last year’s bill was under £1,000, or if more than 80% of your tax was already collected at source, which is the case for most people with a job and a small side income.
Neither applied to me, and I had no idea either existed.
What it actually cost
Not a penalty, in the end. It cost me a fortnight of genuine panic and a 0% purchase card I did not need, and I paid on time. But I want to be specific about what it would have cost if I had not scrambled, because the numbers are steep and they compound.
Miss the filing deadline and it is £100 straight away, whether or not you owe anything. Three months later it becomes £10 a day, up to £900. At six months it is another 5% of the tax due or £300, whichever is greater, and the same again at twelve.
Miss the payment and that is a separate 5% of whatever is unpaid at 30 days, 5% again at six months, 5% again at twelve, plus interest running throughout.
On my £9,917.70, the 30-day late payment penalty alone would have been £495.89. Filing three months late would have added £1,000 before HMRC even looked at the tax.
Rule one: set aside 30%, not 20%
I had been putting away 20% of everything that came in and feeling organised about it.
On £38,000 of profit, 20% is £7,600. The January demand was £9,917.70. I was £2,317.70 short on the day, on a year where I had done nothing wrong except use the wrong percentage.
The set-aside that actually covers a first January is 26.1% of profit, and that is on a basic-rate year with no student loan. Thirty per cent is the number I use now. It is too much in steady years, and the surplus is the float that makes the second year calm.
The important part is that the 30% comes out on the day the invoice is paid, into a different account, and it is not available. Not a mental note.
Rule two: register early, because the deadline is not the one you think
You must tell HMRC by 5 October following the end of the tax year in which you started. So for a business that began in, say, June 2025, the tax year ended on 5 April 2026 and the registration deadline was 5 October 2026, with the return itself not due online until 31 January 2027.
Three dates, four months apart, and the one people miss is the first, because nothing happens on it. There is also a threshold worth knowing: the trading allowance means the first £1,000 of gross trading income a year is tax free and does not need reporting at all. Above £1,000 you register.
Rule three: chase late invoices with the statutory rate, not politely
This is the one that has made me money rather than saved it.
If a business client pays late, you are entitled to statutory interest of 8% plus the Bank of England base rate. Bank Rate is currently 3.75%, so the rate is 11.75%, and you can charge it without it being in your contract, because it is in the legislation. Where no date is agreed, payment is late 30 days after the client receives the invoice or you deliver the work, whichever is later.
On a £2,400 invoice that is about 77p a day. Forty-five days late is £34.77.
The £34.77 is not the point. The point is that a line on the second reminder saying you will be applying statutory interest at 11.75% from a named date gets invoices paid, and a line saying “just following up on this, no rush” does not. I was writing the second one for a year.
The trade-off I still have not solved
I now hold roughly three months of tax money in a separate account, and for most of the year it is a large balance doing very little. That is money not in a pension, not in an index fund, not smoothing a quiet month.
I have decided I am fine with that, because the alternative is the fortnight I had in January, and because a freelance income is lumpy in a way that makes a cash buffer worth more than its theoretical return. But it is a real cost and I am not going to pretend it is free.
What I would do
Open a second current account today, before you read anything else, and start moving 30% of every payment into it on the day it lands.
Then find out whether payments on account will apply to you, which means looking at whether last year’s bill was over £1,000 and whether you have PAYE income covering most of your tax. If they will apply, the number you are budgeting for in January is one and a half times your tax, not your tax.
And put the statutory interest line in your payment terms now, while you are not annoyed with anybody. It is much easier to send when it has been there all along.
Frequently asked questions
When is my first tax return actually due? For the tax year ending 5 April 2026: register by 5 October 2026, paper return by 31 October 2026, online return and payment by 31 January 2027.
Do I definitely have to make payments on account? Not if last year’s tax bill was under £1,000, or if more than 80% of your tax was collected at source, typically through PAYE.
Can I reduce a payment on account? You can ask HMRC to reduce it if you expect to earn less. Get it wrong in the optimistic direction and interest is charged on the shortfall, so it is not a free option.
What is Class 2 National Insurance now? £3.65 a week for 2026 to 2027, and it is treated as paid without you paying it once profits are at or above the £7,105 small profits threshold, which protects your National Insurance record.
Updated on 11 September 2026.
Sources
- Gov.uk, Self Assessment tax returns: deadlines
- Gov.uk, Self Assessment tax returns: penalties
- Gov.uk, understand your Self Assessment bill: payments on account
- Gov.uk, income tax rates and personal allowances
- Gov.uk, self-employed National Insurance rates
- Gov.uk, tax-free allowances on property and trading income
- Gov.uk, charging interest on a commercial debt
Catto Creations is one freelancer writing about her own tax affairs alongside published HMRC rules. It is not personal tax advice.…