Payments on account and personal tax year end planning
When it comes to personal tax year end planning, it’s important to be aware of your tax obligations especially if you file a UK Self-Assessment tax return.
One of the key elements to consider is payments on account, which are advance payments made towards your tax bill for the following year. These payments help avoid a large tax bill building up and are usually based on the previous year’s liability.
In this blog, our team of taxation experts are going to provide you with guidance to help your preparation.
Understanding payments on account
If you’re self-employed or submit a Self-Assessment tax return, it’s important to understand how payments on account work, and how they might affect your cash flow.
Payments on account are advance payments towards your Income tax bill for the upcoming tax year. They’re usually required if your tax bill from the previous year was more than £1,000 and less than 80% of your total tax was collected at source (e.g. through PAYE).
These payments are made in two instalments:
- 31 January (alongside any balancing payment due for the previous tax year)
- 31 July (the second advance payment)
Each payment is typically 50% of your previous year’s tax bill, excluding capital gains and student loan repayments, which are settled in the balancing payment.
If your actual tax liability turns out to be higher than estimated, you’ll need to make a balancing payment by the following 31 January to cover the difference.
For those new to Self-Assessment, it’s common to be caught out by the requirement to pay both your current tax bill and your first payment on account at the same time, potentially increasing your first payment by 50%. Without forward planning, this can lead to unexpected financial pressure.
How do payments on account work?
Payments on account are designed to spread the cost of your tax bill over the year, helping to avoid a large lump sum in one go.
Here’s how they work in practice:
Let’s say your tax bill for the 2023/24 tax year is £3,000. You made two payments on account during the previous year of £900 each, totalling £1,800.
By 31 January 2025, you would need to pay:
- A balancing payment of £1,200 (the difference between your total tax bill of £3,000 and the £1,800 already paid)
- Your first payment on account of £1,500 (50% of the 2023/24 bill) towards the 2024/25 tax year
You would then pay a second payment on account of £1,500 by 31 July 2025.
If your actual tax liability for 2024/25 ends up higher than £3,000, a further balancing payment will be due by 31 January 2026.
Additional considerations for payments on account
Capital Gains Tax and student loan repayments are not included in your payments on account they’re paid as part of your balancing payment.
You’ll only need to make payments on account if your previous year’s tax bill was over £1,000, unless more than 80% of your tax was collected through PAYE.
If your income is expected to fall in the current tax year, it’s possible to request a reduction in your payments on account via HMRC, though it’s important to seek advice first, as underpaying could lead to interest charges.
Need help navigating your year-end personal tax liabilities?
Understanding your Self-Assessment and payments on account can be complex, especially if your income fluctuates or you’re new to the process.
We’re here to guide you through every step, offering tailored advice and end of year tax planning tips, to help you stay on top of your obligations, and identify opportunities to reduce your tax liabilities wherever possible.
Contact Edwards Accountants today to take control of your tax year end planning.
