diff --git a/app/commands.py b/app/commands.py
index 3f27237a9..a499f48f8 100644
--- a/app/commands.py
+++ b/app/commands.py
@@ -807,9 +807,27 @@ def populate_annual_billing_with_defaults(year, missing_services_only):
         active_services = Service.query.filter(
             Service.active
         ).all()
+    previous_year = year - 1
+    services_with_zero_free_allowance = db.session.query(AnnualBilling.service_id).filter(
+        AnnualBilling.financial_year_start == previous_year,
+        AnnualBilling.free_sms_fragment_limit == 0
+    ).all()
 
     for service in active_services:
-        set_default_free_allowance_for_service(service, year)
+
+        # If a service has free_sms_fragment_limit for the previous year
+        # set the free allowance for this year to 0 as well.
+        # Else use the default free allowance for the service.
+        if service.id in [x.service_id for x in services_with_zero_free_allowance]:
+            print(f'update service {service.id} to 0')
+            dao_create_or_update_annual_billing_for_year(
+                service_id=service.id,
+                free_sms_fragment_limit=0,
+                financial_year_start=year
+            )
+        else:
+            print(f'update service {service.id} with default')
+            set_default_free_allowance_for_service(service, year)
 
 
 @click.option('-u', '--user-id', required=True)
diff --git a/tests/app/test_commands.py b/tests/app/test_commands.py
index 4d3f991c8..16b21116a 100644
--- a/tests/app/test_commands.py
+++ b/tests/app/test_commands.py
@@ -1,10 +1,14 @@
+import pytest
+
 from app.commands import (
     insert_inbound_numbers_from_file,
     local_dev_broadcast_permissions,
+    populate_annual_billing_with_defaults,
 )
 from app.dao.inbound_numbers_dao import dao_get_available_inbound_numbers
 from app.dao.services_dao import dao_add_user_to_service
-from tests.app.db import create_user
+from app.models import AnnualBilling
+from tests.app.db import create_annual_billing, create_service, create_user
 
 
 def test_insert_inbound_numbers_from_file(notify_db_session, notify_api, tmpdir):
@@ -36,3 +40,43 @@ def test_local_dev_broadcast_permissions(
 
     assert len(user.get_permissions(sample_service.id)) == 0
     assert len(user.get_permissions(sample_broadcast_service.id)) > 0
+
+
+@pytest.mark.parametrize("organisation_type, expected_allowance",
+                         [('central', 40000),
+                          ('local', 20000),
+                          ('nhs_gp', 10000)])
+def test_populate_annual_billing_with_defaults(
+        notify_db_session, notify_api, organisation_type, expected_allowance
+):
+    service = create_service(service_name=organisation_type, organisation_type=organisation_type)
+
+    notify_api.test_cli_runner().invoke(
+        populate_annual_billing_with_defaults, ['-y', 2022]
+    )
+
+    results = AnnualBilling.query.filter(
+        AnnualBilling.financial_year_start == 2022,
+        AnnualBilling.service_id == service.id
+    ).all()
+
+    assert len(results) == 1
+    assert results[0].free_sms_fragment_limit == expected_allowance
+
+
+def test_populate_annual_billing_with_defaults_sets_free_allowance_to_zero_if_previous_year_is_zero(
+        notify_db_session, notify_api
+):
+    service = create_service(organisation_type='central')
+    create_annual_billing(service_id=service.id, free_sms_fragment_limit=0, financial_year_start=2021)
+    notify_api.test_cli_runner().invoke(
+        populate_annual_billing_with_defaults, ['-y', 2022]
+    )
+
+    results = AnnualBilling.query.filter(
+        AnnualBilling.financial_year_start == 2022,
+        AnnualBilling.service_id == service.id
+    ).all()
+
+    assert len(results) == 1
+    assert results[0].free_sms_fragment_limit == 0