What is HMRC’s Payment on Account System for Self-Assessment and how does it affect me?

Paula Veysey-Smith • 9 July 2025

With many tax payers facing yet another payment to the HMRC on the 31st July let’s answer some frequently asked questions about the Payments on Account System.


When was this system first introduced?

The Payments on Account system was introduced in the 1996–97 tax year, as part of the Self-Assessment overhaul. Before then, HMRC had a fragmented and less predictable system for collecting income tax from self-employed individuals and others outside the PAYE system.  It was introduced to ensure that taxpayers pay tax closer to when they earn their income, rather than facing a large lump sum payment long after the end of the tax year.


Why did HMRC introduce Payments on Account?

There are three key reasons why HMRC introduced this system:


  1. Cash flow for HMRC: This undoubtably is a driving reason for Payments on Account as it spreads the inflow of tax revenue more evenly throughout the year rather than relying on one big payment annually after a tax demand was sent to the tax payer.

  2. Encourages prompt payment: Tax is collected in advance (based on the prior year’s bill), reducing the risk of default or late payments.

  3. Helps tax-payers budget: Although first going into the Payment on Account system is painful as your tax bill, and half of it again, need to be paid on 31st January.  Once in though, it does avoid the shock of a large single tax bill by splitting the liability into two smaller payments.


So how does the Payments on Account system work?


Who Needs to Make Payments on Account?

You’ll need to make payments on account if your tax bill is more than £1,000 and less than 80% of your tax is collected at source (e.g., via PAYE).


When Are Payments on Account Due?

There are two payments  each year:

  1. 31 January – First payment on account for the current tax year
  2. 31 July – Second payment on account for the current tax year


Each is 50% of your previous year’s tax bill (excluding Class 2 NICs and student loan repayments).


Example:

Let’s say your tax bill for the 2023/24 tax year is £6,000.

  • On 31 January 2025:
  • You pay the £6,000 balance for 2023/24
  • Plus a £3,000 payment on account for 2024/25 (50% of £6,000)
  • On 31 July 2025:
  • You pay another £3,000 as the second payment on account for 2024/25


So by July 2025, you've prepaid £6,000 towards your 2024/25 tax bill.


What Happens When You File Your Next Tax Return?


When you submit your 2024/25 return:

  • If the actual tax bill is £7,000, you’ve already paid £6,000, so you owe £1,000 by 31 January 2026.
  • If it’s only £5,000, you’ve overpaid and can get a £1,000 refund or offset it against future payments.
  • If the bill is £7,000 your tax payment will be:
  • on 31st January 26 £1,000 balance on the 2024/25 return bill AND half of the £7,000 (£3 500) balancing payment so £4,500 in total.
  • £3,500 balancing payment on the 31st July 26.

 

Can You Reduce Payments on Account?


Yes you can.

If you expect your income to fall, you can apply to reduce them through your HMRC online account or on the paper form SA303. But if you reduce them too much, HMRC may charge interest on the underpaid amount.


Will Making Tax Digital for Self-assessment change the Payments on Account System?

The short answer is No!   The longer answer is watch this space!!   Many of us professionals believe that with quarterly reporting, quarterly paying will soon follow! For more information on Making Tax Digital for Self-assessment please see our article at:


https://www.mpoweraccounting.co.uk/how-will-i-be-affected-by-making-tax-digital-for-income-tax-mtd-for-itsa


The Payment on Account  system often causes much confusion with self-assessment tax payers. At MPower Accounting  we are used to helping our clients understand when payments need to be made and how they have been calculated.  As an added service we will always send a payment reminder to clients early in July so they are not caught out.  We are also delighted to work with clients who want to complete their self-assessment tax returns early to determine if they are able to reduce the July Payment on Account.


Do contact us if you’d like help with Payments on Account and anything to do with your self-assessment

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Working from Home Expenses You Can Claim in 2025–26

by Paula Veysey-Smith • 22 May 2025
Do you work from home? If you do, either full-time or part-time, you may be eligible to claim certain expenses either against your own taxes or your Limited Company ones. Many factors will determine what you can claim such as working location, employment status (employee, self-employed, company director), and how much of your home is used for work. What can I claim as an employee of a company? You can claim: A flat-rate allowance of £6 per week (or £26 per month) without needing to provide evidence of expenses. This is the simplest method and can be claimed via your tax code or tax return. The actual costs (if you don't use the flat rate) which can include a proportion of the following: Heating and electricity Internet and phone bills Water (if it’s metered and usage is clearly work-related) You cannot claim rent or mortgage interest unless you're self-employed. These expenses can be claimed via HMRC’s online portal if they have not already been reimbursed by your employer! What can I claim if self-employed (sole trader or via a Partnership)? Here you have two options: 1. Simplified Expenses (Flat Rate) Based on hours you work from home each month: 25–50 hours/month → £10/month 51–100 hours/month → £18/month 101+ hours/month → £26/month 2. Actual Expenses Method You can claim a proportion of: Rent or mortgage interest (not capital repayments) Utilities (gas, electricity, water) Council tax Internet and phone Cleaning and maintenance Home insurance (if work-related) You’ll need to work out the percentage of your home used for business, usually by the number of rooms (not including bathrooms, corridors, storage space) or square footage. One word of warning is never claim the whole use of a room for business as every room will have duality in use. This is also important if you own your home as a room declared purely an office could attract Capital Gains Tax when the property is sold. We suggest that any room should only be claimed at 90% for business. And only one room can be used, not a multiple! These costs should be included on your Self-Assessment tax return. Can I make a claim for these expenses in my Limited Company? Yes, you most certainly can. At MPower Accounting we not only recommend using the actual expenses method as set out above, we provide our clients with a bespoke spreadsheet to calculate these expenses, and others such as mileage, on a month-by-month basis. These amounts can then be claimed as expenses to the Company and paid out to you. It is one of the tax efficient methods of taking money from your business. Capturing and calculating monthly your regular working from home expenses is the best way of ensuring they are recorded correctly. To help you do this we are offering a free download of the spreadsheet usually only available to our clients; please use the link below to get this. Paying taxes is a necessary evil but I am a firm believer in minimising this liability for both individuals and companies. Correctly claiming working at home expenses is one way to reduce your tax bill. Please do contact us if we can help you further identifying all the expenses you can claim and also for further assistance in how to correctly use and populate the downloaded template.

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by Paula Veysey-Smith • 28 April 2025
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How will I be affected by Making Tax Digital for Income Tax (MTD for ITSA)?

by Paula Veysey-Smith • 23 March 2025
HMRC are starting to send out letters to sole traders and landlords in the initial steps towards Making Tax Digital for Income Tax. If you receive one of these letters do not panic, help is at hand. So let’s answer your most asked questions about Making Tax Digital. What is Making Tax Digital for Income Tax? Making Tax Digital for Income Tax (MTD for ITSA) is a UK government initiative aimed at modernising the tax system. It will require individuals and businesses to keep digital records and submit tax information to HMRC using compatible software. It is part of a broader initiative to digitalise tax returns and follows on from the changes already implemented for VAT reporting. Will Making Tax Digital affect me? MTD for ITSA will affect individuals who: Are self-employed (e.g. sole traders) and/or landlords (earning income from property). Have a total income over £50,000 per year (combined from self-employment and property). Are currently required to complete a Self-Assessment tax return. From April 2026 , MTD for ITSA will be mandatory for those earning over £50,000. From April 2027 , this threshold will reduce to £30,000. What will I have to do if my earnings are over the threshold? You will need to keep digital records for income and expenses which will mean using MTD compatible software. This will be a major change for those of you still keeping paper records. Instead of submitting an annual self-assessment return you will need to submit quarterly updates 4 times a year to HMRC. At the end of the tax year an End of Period Statement (EPOS) and a Final Declaration will need to be submitted which essentially replaces the current Self-assessment return. All of these will be required digitally, paper records and manual calculations will no longer be accepted. This means that instead of 1 annual return you will need to make 6 submissions! So what software do I need to use to keep digital records? Acceptable software include: QuickBooks Xero FreeAgent Sage or, HMRC-recognised spreadsheet tools with bridging software ( not highly recommended ) No more shoeboxes of receipts or manual books — everything must be digitally recorded. When will I need to register for MTD? You’ll need to sign up for MTD for ITSA before April 2026 . This is a deadline and not a target, signing up early is always advisable. HMRC will provide a service for you to do this but having the guiding hand of an accountant will make this a much easier task.
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