How to hit this summer's tax payment deadline and avoid steep interest charges

Telegraph

30-07-2025

If you complete a self-assessment tax return, then you'll be familiar with the fact that there's a deadline to file that return and pay your tax bill to HM Revenue & Customs (HMRC), which is January 31.
However, you may also need to make a second payment by the end of July – called a payment on account. You're required to pay half of an estimated tax bill ahead of submitting your next tax return, and failing to pay on time means you'll be charged interest on the outstanding tax. Interest is currently set at 8.25pc.
Here's what you need to know about this lesser-known second tax charge.
What is payment on account?
Who has to make payments on account?
How do payments on account work?
How to reduce payments on account
Payments on account FAQs
What is payment on account?
For those who file annual tax returns through self-assessment, a payment on account is an advance payment you make towards your future tax bill.
Rather than paying all the tax due through self-assessment in one lump sum after filing your tax return, your estimated payment is split into two. You pay half in January and half in July.
A payment on account reflects what HMRC estimates will be half your tax bill for the current tax year. The amount is usually half of the previous year's bill, as HMRC assumes you will continue earning at the same level.
Who has to make payments on account?
Payments on account are for those who have previously paid a self-assessment tax bill of £1,000 or more and where less than 80pc of tax is taken through PAYE (Pay As You Earn).
This mostly applies to self-employed workers – those who operate as a sole trader, partnership or even individuals who work as directors under a limited company.
Those receiving a high income from savings and investments can also need to make payments on account if the interest from savings, dividend income and perhaps any rental income from property makes up more than 20pc of your income.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: 'It could happen if, for example, you had earned income of £46,000 and you had savings of £250,000 outside an Isa making 5pc a year – compounding daily. Less than 80pc of your income would be taxed through PAYE, so you'd need to make a payment on account.
'If you had a specific plan to spend the money, you could apply to have the payment on account reduced, but if you planned to leave it saved or invested, you'd need to pay it.'
How do payments on account work?
By January 31, you will have paid the tax bill for the tax year ending April 5, the year before. You will also pay half of the estimated bill for the current tax year.
Then by July 31, you need to pay the second half of the expected tax bill.
Once you have submitted your tax return, the bill the following January will make up the difference between the estimate and reality, where you may be required to make an extra balancing payment, or you'll get a refund if you've overpaid.
On that same day, you'll make the first payment on account for the next tax year – that is, half of what you're expected to owe for your next tax bill.
It's important to put aside enough money for your tax bill for your self-assessment tax return as early as possible – especially if you're newly self-employed – to avoid any nasty January surprises.
Example
Let's say your bill for the 2024-25 tax year is £6,000, but it was £3,600 in 2023-24.
You would make two payments on account of £1,800 each (£3,600 in total) on January 31, 2025 and July 31, 2025 towards this, since HMRC would assume you'd earn the same amount as the year before.
Since your earnings increased, these payments wouldn't cover the amount of tax you owed, so you'd need to make a balancing payment the following January.
That would mean that the amount due by midnight on January 31, 2026 is made up of a balancing payment of £2,400 for the 2024-25 tax year (£6,000 minus £3,600), and then the first payment on account of £3,000 (half your 2024-25 tax bill) towards your estimate for 2025-26.
This means the total you will have paid is £5,400 by January 31 2026. You then make a second payment on account of £3,000 on July 31, 2026.
If your tax calculation for the 2025-26 tax year ends up exceeding the total of your two payments on account, you'll need to make a balancing payment by January 31, 2027.
How to reduce payments on account
The payments on account system can be a helpful way of splitting up your tax bills into more manageable chunks, but if your earnings drop, or if you are about to start an employed role where more than 80pc of your earnings will soon be taxed at source, it can be galling to know you're overpaying and will have to claim a tax refund from HMRC.
In this case, you may be able to reduce your payments on account, but you'll need to apply for a reduction from HMRC by following these steps:
File an application online, or
Fill in, print and post form SA303. Alternatively, you can ask your accountant to do this on your behalf.
When applying, you must include the level of income you expect to receive over the coming year so HMRC can recalculate your revised payment.
While you can apply to pay less, it's important to note that if your tax bill ends up being higher than expected, you will have to pay interest on the difference – so don't take these steps unless you're sure your tax bill will drop.
If you don't reduce the payments and you end up overpaying, you'll get a refund, but no interest will be paid to you.
Reducing your savings interest
If income from savings and investments has resulted in the need to make a payment on account, there are other ways to reduce your tax bill.
Firstly, if you haven't used all of your Isa allowance, consider moving assets inside an Isa wrapper to reduce your tax bill – and payment on account.