Payments On Account - What you need to know

Payments on account are HMRC’s way of collecting Income Tax and Class 4 National Insurance in advance. They apply to most sole traders and landlords who file Self Assessment but still remain unclear to most and often challenging for those submitting their first tax return. Here’s how they work:

1. When do they apply?

You’ll have to make payments on account if both are true:

- Your last Self Assessment tax bill was over £1,000

- Less than 80% of your tax was collected at source, e.g. through PAYE

This catches most sole traders, landlords, company directors with dividends over £500, and anyone with untaxed side income.

Not included: Capital gains tax and student loan repayments aren’t part of payments on account. You settle those in your balancing payment.

2. How much & when do you pay?

Each payment on account is 50% of your previous year’s tax bill and are paid:

31 January - Balancing payment for last tax year + 1st payment on account for current tax year

31 July - 2nd payment on account for current tax year

Example:

You start as a landlord in 2025/26 and owe £1,400 tax. On 31 Jan 2027 you pay:

- £1,400 for 2025/26

- £700 first payment on account for 2026/27 = £2,100 total

That first year feels heavy because you’re paying 1.5 years at once. After that it evens out.

Then on 31 July 2027 you pay:

- £700 second payment on account for 2026/27 = £1,400 total towards your next tax bill.

3. Balancing payment/refund

When you file your next tax return, HMRC works out your actual bill.

- If payments on account were too low → you pay a balancing payment by 31 Jan

- If too high → you get a refund

Example: You paid £2,000 on account but actual bill is £2,500. Balancing payment = £500 due 31 Jan.

4. Can you reduce them?

Yes, if you expect your income to drop, then we can apply to reduce these but it is important to consider all options to avoid interest payments if HMRC deem to be reduced too low.

Common reasons to reduce:

- Profits are down vs last year

- Rental profits fell due to expenses/voids

- You’re retiring or closing the business c108

Warning: If you reduce too much and underpay, HMRC charges interest. So be cautious with estimates.

5. Key points for landlords specifically

- Rental profits are rarely taxed at source, so payments on account are standard once profits >£1,000 tax

- If you use cash basis, income is counted when your agent receives rent, not when they pay you

- High Income Child Benefit Charge can also push you into payments on account if it takes your bill over £1,000

- Dividends above £500 now count too

6. What’s changing with MTD for Income Tax

From April 2026, sole traders & landlords with combined income over £50,000 move to Making Tax Digital.

- You’ll do 4 quarterly updates + 1 final declaration

- Payments on account don’t disappear - you still pay 31 Jan & 31 July

- But quarterly reporting gives you a live view of your tax, so it’s easier to see if you should reduce payments on account 2632

7. Practical tips

1. Do your tax return early - That first-year double hit on 31 Jan catches people out

2. Budget monthly - Put aside ∼25% of profit each month if you’re side-hustling

3. Check/update your tax code if you also have PAYE income

4. Review by July - If profits are down, reduce the 31 July payment via SA303 2632c108

Where to see what you owe: Log into your HMRC account → Self Assessment → View statements

Talk to us today to discuss further - WE ARE HERE TO HELP!!