HMRC Payments on Account – What They Are and How They Work

If you have ever filed a personal tax return and been surprised by HMRC asking for next year’s tax in advance, you're not alone. It is one of the most common points of confusion I see, so let’s run through what it's all about.

What Are HMRC Payments on Account?

Payments on account are a HMRC system which requires you to make advance payments towards your next tax bill. Instead of paying all of your tax in one go at the end of the tax year, HMRC asks you to pay it early in two instalments, and the amounts are based on what you owed last year. It's a bit like a savings plan to ensure you're putting money aside for your tax bills, but it's not optional, doesn't earn you interest, and it often catches people off guard if they weren't expecting it.

Who Has to Make Payments on Account?

You will need to make payments on account if:

• Your tax bill for the year is more than £1,000, and

• Less than 80% of your tax is already collected through PAYE (for example, from employment).

This mainly affects people who are self-employed, have rental income, or other income that is not taxed at source (PAYE).

How Do Payments on Account Work?

Here is how it looks in practice:

• You file your tax return for the year.

• HMRC calculates your bill.

• If you meet the criteria above, HMRC will ask you to pay by 31st January:

  • Your current year’s tax bill in full, and

  • Half of next year’s tax bill, based on this year’s figure. This is your first payment on account.

• You then make a second payment by 31st July. This is your second payment on account.

For example, let us say your 2024/25 tax bill is £3,000.

• You pay the full £3,000 by 31st January 2026.

• You also pay half of that (£1,500) as your first payment on account for 2025/26, also by 31st January 2026.

• Another £1,500 will be due by 31st July 2026 for your second payment on account.

What Happens in the Second Year and Beyond?

When you file your next tax return, HMRC looks at how much tax you actually owed for that year, and if your payments on account did not cover the full amount, you will make a balancing payment by 31st January to cover the remaining balance. Alternatively, if you paid more than you needed to, you'll either get a refund or it's put towards your future payments.

HMRC then sets up your next year’s payments on account based on the tax that was due on this latest return. This means your advance payments keep rolling forward, always based on the most recent year of income.

Using the previous example. When you file your 2025/26 tax return, HMRC compares what you actually owe with what you already paid (£3,000 in this case, 2 x £1500).

• If your tax bill is £3,200, you pay the £200 balancing payment by 31st January 2027.

• Your new payments on account for 2026/27 will now be based on this updated £3,200 figure, so £1,600 due in January and £1,600 in July.

It feels like double paying in the first year, but from then on, you are simply paying in advance for the following year and topping up if needed. If you ever stop self-assessment or your tax bill falls below the thresholds, you can claim back any advance payments made in excess of your final tax due.

Can I Reduce My Payments on Account?

Yes, but you need to be careful. If you know your income will be lower next year, you can apply to reduce your payments on account. However, if you reduce them too much and your income does not drop as expected, HMRC will charge interest on the underpayment from the point it was originally due. Unless you have a significant drop in income, you are likely better off paying the calculated payments on account and then reclaiming any overpayment, if applicable, once you've filed your tax return.

Key Takeaways

• Payments on account are advance payments based on last year’s tax.

• They are common for self-employed and rental income earners.

• They can feel like paying twice the first time, but it evens out.

• If your income is going down, you may be able to reduce them, but be careful you don't over-adjust!