Understanding Payment on Account: A Complete Guide for UK Taxpayers

If you've completed a Self Assessment tax return and owed more than £1,000 in tax, you may have encountered the term 'Payment on Account'. For many taxpayers in Gravesend, Kent and across the UK, these advance payments can come as an unwelcome surprise. In this guide, we explain exactly what Payments on Account are, why HMRC requires them, and how you can plan effectively to manage your cash flow.

What Are Payments on Account?

Payments on Account are advance payments towards your tax bill for the current tax year. Rather than paying all your tax in one lump sum after the tax year ends, HMRC requires you to make two advance payments based on your previous year's tax liability.

Think of it as HMRC's way of collecting tax closer to when you earn the income, similar to how employees have tax deducted through PAYE each month. For self-employed individuals and those with other untaxed income, Payments on Account serve the same purpose.

Who Needs to Make Payments on Account?

You'll need to make Payments on Account if both of the following apply:

• Your Self Assessment tax bill was more than £1,000
• Less than 80% of the tax you owe was collected at source (for example, through PAYE)

This typically affects self-employed individuals, landlords with rental income, partners in business partnerships, and those with significant investment income not taxed at source.

When Are Payments on Account Due?

There are two Payment on Account deadlines each year:

• 31 January – First payment on account (along with any balancing payment from the previous year)
• 31 July – Second payment on account

For example, for the 2024/25 tax year, your first payment on account is due on 31 January 2025, and your second payment is due on 31 July 2025.

How Are Payments on Account Calculated?

Each Payment on Account is exactly half of your previous year's tax bill. HMRC assumes your income will be similar year-on-year, so they base the advance payments on what you owed before.

Example Calculation

Let's say Sarah, a self-employed graphic designer based in Gravesend, had a tax bill of £6,000 for the 2023/24 tax year. Here's how her payments would work:

• 31 January 2025: £6,000 balancing payment for 2023/24 PLUS £3,000 first payment on account for 2024/25
• 31 July 2025: £3,000 second payment on account for 2024/25
• 31 January 2026: Balancing payment (if any) plus first payment on account for 2025/26

This means Sarah would need to pay £9,000 on 31 January 2025 – the full previous year's tax plus half of the anticipated current year's tax. This is why January can be a challenging month for cash flow!

The Balancing Payment Explained

After both Payments on Account have been made, HMRC calculates your actual tax liability for the year. If your Payments on Account didn't cover the full amount, you'll owe a 'balancing payment'. If you've overpaid, you'll receive a refund.

Scenarios that affect your balancing payment:

• Income increased: You'll owe additional tax as a balancing payment
• Income decreased: You may be due a refund or have a reduced balancing payment
• Income stayed similar: Your balancing payment should be minimal

Can You Reduce Your Payments on Account?

Yes, if you know your income will be lower than the previous year, you can apply to reduce your Payments on Account. This is done through your HMRC online account or by contacting HMRC directly.

Important warning: Be careful when reducing your payments. If you reduce them too much and your actual tax bill is higher than anticipated, HMRC will charge interest on the underpaid amount. It's always advisable to discuss this with your accountant before making any reductions.

Why Does HMRC Require Payments on Account?

The Payment on Account system exists for several reasons:

• Consistent cash flow for the Treasury: Rather than receiving large lump sums once a year, HMRC receives tax revenue more evenly throughout the year
• Parity with PAYE taxpayers: Employees pay tax monthly through their wages, so Payments on Account create a similar arrangement for the self-employed
• Reduced risk of non-payment: By collecting tax in advance, HMRC reduces the risk of taxpayers being unable to pay a large bill at the end of the year
• Encouraging financial planning: Regular payments encourage taxpayers to set money aside throughout the year

Tips for Managing Payments on Account

At MCC Partners, we help clients across Gravesend and Kent manage their tax payments effectively. Here are our top tips:

• Set aside money monthly: Calculate your expected annual tax and divide by 12. Transfer this amount to a separate savings account each month
• Use the 30% rule: As a rough guide, set aside 30% of your profits for tax and National Insurance
• Mark the deadlines: Add 31 January and 31 July to your calendar with reminders
• File your return early: The sooner you file, the sooner you'll know exactly what you owe
• Consider a budget payment plan: HMRC offers the option to spread payments through a Budget Payment Plan if you're up to date with your tax affairs

What Happens If You Miss a Payment?

Missing a Payment on Account deadline results in:

• Interest charges: HMRC charges interest on late payments from the due date until payment is received
• Potential penalties: For significant delays, penalties may also apply

If you're struggling to pay, contact HMRC as soon as possible. They may agree a Time to Pay arrangement, allowing you to spread the cost over several months.

How MCC Partners Can Help

Understanding and managing Payments on Account can be complex, especially when your income fluctuates year-on-year. As experienced accountants serving small businesses and individuals across Gravesend and Kent, MCC Partners can help you:

• Calculate your expected tax liability accurately
• Plan for upcoming Payment on Account deadlines
• Advise whether reducing your payments is appropriate
• Identify legitimate ways to reduce your overall tax burden
• Keep you compliant with all HMRC deadlines

Don't let Payments on Account catch you off guard. With proper planning and professional support, you can manage your tax payments confidently and maintain healthy cash flow throughout the year.

Get in touch with MCC Partners today to discuss your tax planning needs. Visit us at 1a Saddington Street, Gravesend, Kent DA12 1ED, or contact us to arrange a consultation. We're here to help you navigate the complexities of UK tax with a friendly, jargon-free approach.