What is a Payment on Account?

Payments on Account are advance payments towards your next tax bill. These are made in two payments with the first due to be paid by 31 January in the tax year to which the payment relates, and the second by the 31 July following the end of the tax year.

These payments are estimated based on your previous year’s tax liability, assuming all is equal, as 50% of the previous year’s tax liability due in payment 1 on 31 January, and the remaining 50% due in payment 2 on 31 July.

Once your actual tax liability is calculated and submitted to HMRC, you will either be due a refund if the liability is lower than the payments made, or have a “balancing payment” due by the following 31 January.

Any tax liabilities arising on Capital Gains Tax and any student loan payments made via Self Assessment are not included in the calculation of the Payments on Account

Do I have to pay it?

In short, yes, unless your tax liability for the previous year was less than £1,000 or 80% of your tax due for the year is collected at source (e.g. via PAYE deductions in your employment).

If these do not apply, you will be under the payment on account regime.

Any underpayment of payments on account will be charged interest.

Example 1

In 22/23, John had a tax liability of £5,000. None of his tax due for the year was collected at source and he has never previously made a payment on account.

On 31 January 2024, John is therefore due to pay his balancing payment for 22/23 of £5,000, plus his first payment on account for 23/24 which is estimated at £2,500.

On 31 July 2024, John is then due to pay his second payment on account of £2,500.

When John prepares his 23/24 tax return, his actual liability is £6,000. Therefore, he has a balancing payment due on 31st January 2025 of £1,000, along with his first payment on account for 24/25 of £3,000.

Can I reduce my payments on account?

Yes. If you believe that your tax liability is going to be lower than the previous year, you can claim to reduce your payments on account, or more precisely, we can reduce your payments on account on your behalf.

Please note, however, that if you reduce your payments on account by too much, you will be charged interest on any balance due as though the original payment dates applied.

Example 2

In 24/25, one of the income sources contributing to John’s tax liability has stopped. He therefore estimates that his tax liability is only going to be £4,000 and so claims to reduce his 24/25 payments on account. Rather than being due to make a payment on account of £3,000 on 31st January 2025, he is now due to pay £2,000, along with a further £2,000 by 31st July 2025.

When John submits his 24/25 return, his actual tax liability for the year is £4,500 and therefore, his payments on account have been reduced by too much (£500 in total, or £250 per payment).

HMRC will then retrospectively charge John interest on £250 from 31st January 2025 to the date the balance was paid and further interest on £250 from 31st July 2025 to the date the balance was paid.

Common Problems

The first year that a taxpayer is due to make payments on account will usually result in a fairly significant cash hit as they are due to pay their balancing payment for the previous year, plus the first payment on account for the current year, by 31st January.

In Example 1, above, John had a total payment to make on 31st January 2024 of £7,500.

If your tax liabilities are only just below the £1,000 level, you should be aware of the potential increase to your payment in the following January if your liability increases to £1,000.

Similarly, the first year that there has been a significant increase in your tax liability, this is also likely to result in an increase to the following year’s payment on account.

Final Thoughts

Understanding your payment on account will make it easier to anticipate your next tax bill. Submitting your tax return as early as possible post 5th April will give you as much time as possible to budget for any additional payment to be made by the following 31st January.

Also, if your return is submitted prior to the deadline for Payment on Account 2 (31st July) and your liability is lower than the estimated liability for payment on account purposes, you can also reduce this payment on account by the difference!

Speak to one of our tax team by contacting our reception on 0141 221 6516 if you require further support.