Self-assessment tax returns are a vital aspect of the UK tax system for anyone who is self-employed, runs their own business, or has other untaxed income such as rental or investment income.
As part of this process, you may encounter a requirement to make payments on account, which can be confusing for many taxpayers. In this article, we will explain what payments on account are, who needs to make them, how they are calculated, and how to manage them effectively.
What Are Payments on Account?
Payments on account are advance payments towards your next year’s income tax and National Insurance contributions (NICs). Essentially, if you owe a significant amount of tax in one tax year, HMRC will ask you to make these advance payments towards the following year’s tax bill to ensure you do not fall behind in your payments.
These payments are usually made in two instalments – one by 31 January and the other by 31 July each year. They are designed to spread the cost of your tax liabilities, preventing a large lump sum from being due at the end of the next tax year.
Who Needs to Make Payments on Account?
Payments on account are only required if your tax bill for the previous tax year (after deducting any PAYE tax already paid) exceeds £1,000. Additionally, you will not be required to make payments on account if 80% or more of your total tax liability has already been collected at source (i.e., through PAYE).
Common examples of individuals who may need to make payments on account include:
Self-employed individuals and freelancers.
Landlords with rental income.
Investors with dividends or other untaxed income.
Anyone receiving income that is not subject to PAYE.
How Are Payments on Account Calculated?
Each payment on account is typically based on 50% of your previous year’s tax liability. Let’s break down how this works:
Step 1: Calculate your tax bill for the previous year. For example, if your tax bill for 2023/24 is £4,000, you will be required to make payments on account for the 2024/25 tax year.
Step 2: You will pay 50% of this amount on 31 January 2025 (i.e., £2,000) and another 50% on 31 July 2025 (another £2,000).
Step 3: When you file your tax return for 2024/25 in January 2026, if the total tax due for the year is more than what you have already paid, you will need to pay the difference. This amount is called the balancing payment.
Conversely, if your actual tax liability is lower than expected, you can reduce your payments on account (more on that later).
Example of How Payments on Account Work
Let’s assume your tax bill for the 2023/24 tax year is £4,000, and you are required to make payments on account.
Date | Payment Type | Amount |
31 January 2025 | 1st Payment on Account | £2,000 |
31 July 2025 | 2nd Payment on Account | £2,000 |
31 January 2026 | Balancing Payment (if owed) | Based on actual tax for 2024/25 |
Let’s say your actual tax liability for the 2024/25 tax year turns out to be £5,000. In this case, you will have already paid £4,000 through payments on account, so your balancing payment due in January 2026 will be £1,000. If your tax liability is only £3,500, HMRC will refund you £500 (since you’ve overpaid by that amount).
What If Your Income Drops?
If you know your income for the current year will be lower than the previous year, and you expect to owe less tax, you can apply to reduce your payments on account. This can be done through your online HMRC account or by completing the SA303 form.
Be cautious when reducing payments on account. If you underestimate your tax liability and reduce your payments too much, you will need to pay the shortfall as well as interest on the underpayment.
How to Manage Payments on Account
Plan Ahead: Payments on account can lead to a significant outlay early in the tax year, so it’s essential to budget and ensure you have funds set aside to meet these payments.
Monitor Your Income: Keep track of your income throughout the year. If you notice a significant drop, apply to reduce your payments on account to avoid overpaying.
Stay Organised: Missing the payment deadlines of 31 January and 31 July could result in penalties or interest. Mark these dates on your calendar and set up reminders to ensure timely payments.
Keep Reserves for Balancing Payments: Even though you make payments on account, your actual tax liability might still exceed what you’ve paid, resulting in a balancing payment. It’s wise to keep some reserves for any unforeseen shortfall.
Penalties and Interest
If you fail to make payments on account by the due dates, HMRC may charge interest on the amount owed. However, penalties are usually only applied if you have failed to file your tax return on time or have underpaid your tax.
Final Thoughts
While payments on account may seem like an added burden, they are designed to help taxpayers avoid large lump-sum payments at the end of the year. By spreading the tax liability across two instalments, it makes managing your cash flow easier throughout the year.
If you are uncertain about whether you need to make payments on account or if you are unsure how to calculate them, it’s advisable to consult with a tax professional. Ensuring that you stay compliant with HMRC’s rules and meeting your obligations on time will help you avoid unnecessary stress, penalties, and interest charges.
Need Help?
If you need assistance with your self-assessment tax return or have any questions about payments on account, Duo Accountants is here to help. We specialise in providing tax advice and accounting services for small business owners and individuals across the UK.