Payments on Account, Helping You Manage Your Self-Assessment Payments
The term ‘Payments on account’ confuses a lot of people.
Payments on account only apply if your liability is over £1,000 and the amount due is more than 80% of the tax paid through PAYE. For example, you could have a self-assessment liability of £3,000 but if you have PAYE income that includes tax of £16,000, you wouldn’t have to make payments on account.
Why Pay on Account? Aligning Your Payments
Unlike some of the social media hype or scare stories you might have seen, these payments are designed to align your tax payments with when the profits are earned.
Let’s use an example: For the 2024/2025 self-assessment return, your tax payment is due on January 31, 2026. Income earned in April 2024, therefore isn’t taxed until almost 21 months later.
With, payments on account, some of this tax gets paid on 31st January 2025 and 31st July 2025 so while it’s still significantly later than the profits were earned, it’s far more aligned with those dates.
As the tax return deadline for the period isn’t until the 31st of January 2026, it does mean that HMRC won’t necessarily have the information to calculate your tax due so they use the previous year’s tax liability to estimate it; i.e. the 2023/2024 self-assessment tax return.
Your payments on account are calculated as 50% of the tax due in that previous tax year.
Early reporting for accurate payments
It could be that your July payment on account is calculated too high because your profits have decreased. By doing your self-assessment return before July, you can reduce this payment on account to the actual amount due.
If this still results in a tax overpayment, then any surplus can be repaid, and you will get ‘interest’ on this – called a ‘repayment supplement’. Alternatively, the payment could be carried over to your next tax liability, continuing to earn interest.
Of course, you may already know that your payments on account are going to be too high, perhaps you used to have significant dividend income but sold the shares in the previous tax year. In such cases you can choose to reduce your payments on account to match these expectations. Do note, however, that if you overestimate this reduction you will be liable for interest on the shortfall so I generally recommend just getting the self-assessment return done before the July payment on account is due.
I hope this helps but if you are still unsure then ask your accountant. Click here to get in touch with me.