As 31st January 2025 approaches, many individuals face the annual ritual of filing and paying their self-assessment tax return. For some, this comes with an additional obligation: the payment on account. But what exactly is a payment on account, and why is it due alongside your balancing payment? Let’s break it down into simple, manageable terms to help you stay on top of your tax obligations for 2025.
What Is a Payment on Account?
A payment on account is essentially a way for HMRC to collect income tax in advance. If you’re self-employed, a limited company contractor, or have other income not taxed at source, payments on account help spread the cost of your annual tax bill over the year. They’re calculated based on your previous year’s tax liability, with the total payment split into two instalments—one due in January and the other in July.
Who Needs to Pay?
You’ll need to make payments on account if your tax bill exceeds £1,000, unless more than 80% of your income tax has already been collected through PAYE. This means payments on account generally apply to those with self-employed earnings, rental income, or other untaxed income sources.
January 2025: What to Expect
For the tax year 2023/24, your first payment on account for 2024/25 is due by 31st January 2025. This payment will be 50% of your previous year’s tax bill, excluding any amounts for capital gains or student loans.
Here’s an example to illustrate:
- 2023/24 Tax Bill: £2,500
- Payments on Account for 2024/25: Two instalments of £1,250 each (due in January 2025 and July 2025)
Additionally, your balancing payment for 2023/24 is also due by 31st January 2025. This is the final amount required to settle any outstanding tax for the prior year.
How Are Payments on Account Calculated?
HMRC calculates your payment on account based on your most recent self-assessment tax return. If your income fluctuates significantly year-on-year, this can lead to overpayments or underpayments:
- Overpayment: If your tax bill is lower than anticipated, HMRC will refund the difference or use it to offset your next tax liability.
- Underpayment: If your tax bill is higher, you’ll need to pay a balancing payment to cover the shortfall.
Can You Reduce Your Payment on Account?
Yes, if you expect your income for the 2024/25 tax year to be significantly lower than in 2023/24, you can apply to reduce your payments on account. Be cautious, though—if you reduce the payments too much and your tax bill ends up being higher, HMRC will charge interest on the shortfall.
How to Make Your Payment
HMRC provides various methods to make your payment on account, including:
- Online or telephone banking
- Debit or corporate credit card
- Direct Debit
- Bank transfer
- Cheque
Ensure your payment reaches HMRC by 31st January 2025, to avoid penalties or interest. If you’re paying by cheque or bank transfer, it’s wise to allow a few extra days for processing.
Planning Ahead
Payments on account can be a financial strain, especially for those new to self-assessment. Here are some tips to stay prepared:
- Budget throughout the year: Set aside a portion of your income each month to cover tax payments.
- Use accounting software: Tools like FreeAgent can help you track your income and estimate tax liabilities.
- Seek professional advice: If you’re unsure about your tax position, an accountant can provide tailored guidance to ensure you’re not overpaying or underpaying, and to plan for your tax liabilities in advance.
Final Thoughts
While payments on account might seem like an added burden, they’re designed to prevent a large, single tax bill at the end of the year. By understanding how they work and planning ahead, you can avoid unnecessary stress and ensure your self-assessment journey runs smoothly.
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