When it comes to UK taxes, you may encounter the term “Payments on Account” as part of your Self-Assessment process. If you’re self-employed or a landlord, these advance tax payments could be a key part of managing your tax obligations. In this blog post, we’ll break down what Payments on Account are, who needs to make them, and how to manage them effectively. Keep reading to ensure you are fully prepared.
What Are Payments on Account?
Payments on Account are advance payments made towards your next Self-Assessment tax bill. Rather than paying the entire tax bill for the year in one lump sum at the end of the tax year, HMRC requires certain taxpayers to pay part of their bill early. These payments are split into two installments throughout the tax year. This helps to smooth out your cash flow and makes it easier to manage substantial tax bills.
Why Does HMRC Require Payments on Account?
At first glance, paying taxes in advance may seem unusual. However, there are valid reasons behind this system:
- Cash Flow Management: Many self-employed individuals and landlords face large tax bills. Payments on Account break down this burden into smaller amounts, making it easier to manage throughout the year.
- Steady Tax Revenue: From HMRC’s perspective, receiving tax payments throughout the year ensures a steady flow of revenue, much like the PAYE system for employees.
Typically, HMRC estimates that your income and tax bill will be similar to the previous year. They then ask you to prepay this estimated amount in two equal installments.
Key Deadlines for Payments on Account
There are two important dates you need to keep in mind when making these payments:
- 31st January: This deadline is a busy one. It is not only the due date for the first Payment on Account for the next tax year, but also for filing your Self-Assessment tax return and paying any outstanding tax for the previous year.
- 31st July: The second payment is due, which is usually just the second half of your estimated tax bill for the current year.
Who Needs to Make Payments on Account?
Not everyone who files a Self-Assessment tax return is required to make Payments on Account. HMRC has specific criteria to determine who needs to pay in advance.
The Criteria for Payments on Account
You will be required to make Payments on Account if:
- Your tax bill exceeded £1,000 for the previous tax year.
- Less than 80% of your tax was already deducted at source (through PAYE or other similar systems).
If you have income that isn’t automatically taxed (like self-employment income or rental income), and this makes up a significant portion of your tax bill, you are likely to be asked to make Payments on Account.
When You Don’t Have to Make Payments on Account
You will not be required to make Payments on Account if:
- Your tax bill was £1,000 or less.
- 80% or more of your tax was already deducted at source (through PAYE or similar systems).
For example, if you have a main job where tax is deducted at source, and your side income is small, you may not need to worry about Payments on Account.
How Are Payments on Account Calculated?
The calculation for Payments on Account is relatively straightforward. It’s based on the tax bill from your previous Self-Assessment return. Here’s how it works:
- Total tax bill from last year ÷ 2 = Payment on Account amount.
For example, if your tax bill for the 2024/25 year was £3,000, each of your Payments on Account for the 2025/26 tax year would be £1,500. These payments are due in two equal parts, with one due by January 31st and the second by July 31st.
Balancing Payments
Remember that the January payment might include more than just your first Payment on Account for the next tax year. You may also need to make a balancing payment for any remaining tax due for the previous tax year.
Is Payment on Account Mandatory?
Yes, if you meet HMRC’s criteria (a tax bill over £1,000 and less than 80% of it deducted at source), you must make Payments on Account. This is part of the tax process for individuals with significant untaxed income.
Failing to make these payments on time can result in interest charges from HMRC, so it’s essential to adhere to the deadlines.
What If Your Income Drops?
If you anticipate earning less in the current tax year, you can request a reduction in your Payments on Account. You can do this through your HMRC online account or by submitting form SA303. However, be cautious when reducing your payments — if your estimate is too low and you end up owing more tax, HMRC will charge interest on the shortfall.
What to Do If You Can’t Afford Payment on Account
If you can’t afford your Payments on Account, don’t ignore the issue. Contact HMRC immediately to discuss a potential Time to Pay arrangement, which allows you to pay in installments. If your income has decreased, you may also be able to reduce your Payments on Account, as mentioned earlier.
Corporation Tax and Payments on Account
While this guide focuses on Self-Assessment payments, it’s worth noting that limited companies also make Payments on Account for Corporation Tax. These are generally required if the company’s taxable profits exceed £1.5 million, and payments are made in installments before the company’s accounting period ends.
Payments on Account in Business Context
In the broader business world, “payment on account” often refers to partial payments made toward a larger invoice or project. This helps businesses manage cash flow and reduces the amount owed by the customer.
5 Tips for Managing Payments on Account
Managing your Payments on Account is key to avoiding financial stress. Here are a few practical tips:
- Budget and Save: Set aside a portion of your income throughout the year to cover your tax bill.
- Use Accounting Software: Keep track of your income and expenses to make tax time easier.
- Maintain Good Records: Accurate records ensure that your tax return is correct, which directly affects your Payments on Account.
- File Early: Filing your tax return early gives you clarity on your payments and more time to plan.
- Get Professional Help: If you’re unsure about your Payments on Account, seek advice from a tax professional.
By staying on top of your Payments on Account, you can ensure that you’re prepared for tax season and avoid unnecessary stress.
