What is a Payment on Account?

Is the 31st of July the forgotten payment deadline?

Individuals who find themselves in the self-assessment regime know the significance of 31 January – the filing and payment deadline of the previous year’s self-assessment. The filing and payment deadline falling on the same day is convenient with one date to remember. For Individuals with a tax liability of over £1,000 where less than 80% of their income is deducted at source, they are due to pay payments on account, and this brings with it another payment deadline, 31 July. 

What is a payment on account?

Payments on account are payments made in advance towards your tax liability. There are two payments made – one by 31 January and one by 31 July each year. These payments are calculated based on the tax liability you incurred in the previous year, with 50% due in January and 50% due in July.  

For example, if the 2023/24 tax year was the first year an individual met the criteria, and their tax liability was £2,000, their tax payments would be as follows: 

• £2,000 2023/24 balancing payment due by 31 January 2025. 
• £1,000 2024/25 1st payment on account, also due 31 January 2025. 
• £1,000 2024/25 2nd payment on account due 31 July 2025. 

The first year this applies, it can come as a shock due to the taxpayer needing to pay the whole tax liability for the previous year as well as the first payment on account for the following year by 31 January.  

Can I opt out of payments on account?

The short answer is no, but you may be able to reduce them if you know what your income will be in the current tax year.  

If submitting a tax return in January, the taxpayer may know the level of income for the previous 10 months and have an idea of what their income will be for the remainder of the year. If they have had a drop in income, or are ceasing a trade, an election can be made on the tax return to reduce the payments on account better to reflect the likely liability in the following year. It is also possible to make this election via the taxpayer’s HMRC account at any time during the year if circumstances change. 

If you feel you may meet these criteria, it is beneficial to err on the side of caution. If an individual reduces their payments on account to an amount lower than the final tax liability in the year, HMRC will charge late payment interest on the underpaid amount. The current late payment interest rate is 8.25%, and interest will run from the point the liability becomes due up until the date of payment.  

Is there a benefit to early submission?

With the tax year ending 5 April, there is a 4-month window for an individual to submit the tax return before the second payment on account becomes due. The earlier a tax return is submitted, the more beneficial this can be for a taxpayer.  

If the tax return is submitted before 31 July and the liability is less than the previous year, the payments on account will be recalculated based on the actual liability, and the amount due in July will be reduced accordingly.  A repayment may even be due to the taxpayer if the tax liability is lower than the first payment on account that was made in January.  

If the tax return is submitted early and the liability has increased on the prior year, it gives you advance notice of the additional tax that will be due in January, allowing you more time to plan for this. 

I am late paying my payments on account – what next?

HMRC do not charge late payment penalties and surcharges on late payments on account in the same way as they do with late balancing payments, but they do charge late payment interest.  The interest charged will depend on the liability outstanding and when the liability is eventually paid. If you find yourself in a position where you may struggle to pay the payments on account, you can and should contact HMRC and set up a “Time to pay” arrangement here. 

How can we help?

Our dedicated Private Client team are here to help in a variety of ways. We can support you with:  

• Tailored tax planning – we are here to guide you with tax planning and payment forecasting, so that you always feel ahead of the curve and ready for all upcoming liabilities. 
• Reducing payments on account – we can advise on reducing payments on account as well as making the claims on your behalf. 
• Reminders – reviews of liabilities and proactive reminders of upcoming deadlines. 

If you require any further advice on payments on account, please get in touch with Carol Edwards, Josh McCranor or your usual AAB contact.