Self-Assessment Payments on Account
Payments on account are advance tax payments towards the current tax year based on your tax liability from the previous year's tax return. For instance, if you've just filed your 2023-24 tax return, your tax payment is due to HMRC by 31 January 2025 plus an additional payment for 2024-25.
Who needs to make payments on account?
Payments on account are required if:
- Less than 80% of your income is taxed at source (e.g., through PAYE), and
- Your total tax liability exceeds £1,000
If you anticipate lower untaxed income in the current year, you can apply to HMRC to reduce your payments on account. This can be done through your HMRC online account and doesn't require adjustments to your tax return.
Why do I need to make payments on account?
HMRC's rationale is that taxes would be deducted monthly if you were employed and paid under PAYE. However, for those who aren't taxed at source, tax payments would normally be due months after the tax year ends (e.g., January following the April end of the tax year).
HMRC introduced payments on account to speed up tax collection, ensuring taxes are paid earlier.
After your first year of tax liability, you'll be required to pay 50% of your previous year's tax bill in advance for the following tax year. For example:
- In January 2025, you will pay 50% of your 2023-24 tax bill towards your 2024-25 tax liability
- The remaining 50% will be due in July 2025
This system assumes a similar income level year to year, so while the payment timeline is shortened, it's still longer than for PAYE taxpayers who pay tax monthly. In your next tax return (for 2024-25, due by 31 January 2026), the two payments made in January and July 2025 will count toward that tax bill.
If your income was higher than expected, you'll need to make an additional "balancing" payment by 31 January 2026. If it is lower, HMRC will issue a refund for the overpaid amount.
Can I reduce my payments on account?
Yes, if you expect your untaxed income to decrease, you can apply to HMRC to reduce your payments on account. This might be relevant if, for example:
- You've closed a business and will no longer receive dividends, or
- You've sold a rental property and won't have rental income.
Be cautious when reducing these payments. If your final tax liability ends up being higher than expected, HMRC will charge interest on the underpayment. Therefore, it's advisable only to reduce payments if you're confident of your income and the associated tax projections.
HMRC typically refunds any overpaid tax from payments on account within ten days of submitting your tax return.
Examples:
- James: James' only income is from rental properties. In 2023-24, his tax bill is £50,000, payable by 31 January 2025. HMRC also requires him to make two payments on account towards his 2024-25 tax liability. He will pay £75,000 in January 2025 (£50,000 for 2023-24 + £25,000 as the first payment on account for 2024-25) and the second payment of £25,000 in July 2025. When James files his 2024-25 tax return, these two payments of £25,000 will be credited against any tax he owes. If he knew his rental income would be lower (e.g., due to tenant vacancies or repairs), he could apply to reduce the payments on account.
- John: John has a tax liability of £900 for 2023-24. Since his tax bill is under £1,000, he is not required to make payments on account.
- Jim: Jim's 2023-24 tax liability is £100,000, but £80,000 was already deducted through PAYE from his salary as a software engineer. He owes £20,000 due to rental income. Since 80% of his tax liability was already collected at source, Jim is not required to make payments on account.