UK Payments on Account explained: Why HMRC wants more tax early

Key takeaways

Early collection: Collects tax early from individuals whose income is not fully taxed at source.

Qualifying triggers: Required if the previous bill is over £1,000 and less than 80% of tax was collected at source.

Twice-yearly instalments: Due in two 50% instalments on 31 January and 31 July.

Many taxpayers are surprised when they file their Self-Assessment tax return, settle their tax bill, and then discover that HMRC is asking them to make an additional payment towards next year's tax liability.

This system is known as Payments on Account, and while it can feel like HMRC is demanding tax twice, it is simply a mechanism designed to collect tax earlier from individuals whose income is not fully taxed at source.

When do Payments on Account apply?

Payments on account are generally required if:

• Your Self-Assessment tax bill exceeds £1,000; and
• Less than 80% of your total tax liability has already been collected at source

If both conditions are met, HMRC will normally require Payments on Account for the following tax year.

How are Payments calculated?

Each Payment on Account is normally equal to 50% of the previous year's income tax and Class 4 National Insurance liability reported through Self-Assessment. Capital gains tax and certain other charges are excluded from the calculation The payments are due in two instalments on 31 January and 31 July, with the balance payable the following 31 January.

Planning opportunities

Effective tax planning can help manage the impact of Payments on Account.

Potential strategies include:

• Setting aside funds throughout the year for future liabilities or simply paying into your HMRC account each month (your payments will remain on your account and will be available to offset your future tax liability).
• Reviewing whether a reduction claim is appropriate.
• Understanding whether one-off gains have artificially inflated the calculation.
• Forecasting future tax liabilities before filing the tax return.

Taking a proactive approach can prevent unwelcome surprises and improve cash flow management.

Glossary

Self-Assessment: The system for reporting income not taxed at source.

Payments on Account: Advance payments made twice a year towards the next self-assessment bill.

Taxed at source: Tax deducted automatically from income, such as PAYE.

National Insurance: A tax on earnings funding state benefits.

Reduction claim: A request to lower advance payments based on anticipated lower income.