How to process HMRC payments on account for UK businesses

While strictly an individual tax liability, managing HMRC payments on account is a critical balancing act for finance managers and HR leaders in growing UK companies, as it directly impacts director remuneration, partnership cash flow, and broader compliance strategies.

What is HMRC Payment on Account?

The HMRC Payment on Account system is a mechanism by which taxpayers pay their Self Assessment tax and Class 4 National Insurance in advance. The goal is to help spread the cost of tax year liabilities, rather than facing a single lump sum at year-end.

HMRC also created the system to ensure that the exchequer receives a more steady flow of income throughout the year.

Many business owners find this system helpful for cash flow management, as it helps prevent the shock of a massive bill at the end of the fiscal period.

However, it can catch you off guard if your income fluctuates significantly. This means that proactive financial planning is essential to avoid liquidity issues, and you should learn how the system may affect your specific business model.

Who needs to make payments on account?

The majority of self-employed individuals and company directors with untaxed income will need to make payments on account.

However, there are specific exemptions. You will not need to make these payments if your Self Assessment tax bill for the previous year was less than £1,000, or if more than 80% of your tax was deducted at source, for example through your tax code. This exemption often applies to employed individuals who do some extra work on the side. If you do not meet these criteria, you should prepare to pay after you file your return.

When are the deadlines for payments on account?

The deadlines for the two yearly payments on account are strictly set for midnight on 31st January and 31st July.

The first payment is due on the same day as your balancing payment for the previous tax year. This means January can be an expensive month for businesses. The second payment is due by the end of July. It is vital to start planning early to ensure you have the funds available in your bank account before the midnight cut-off.

What happens if I miss a payment?

If you fail to pay by the deadline, HMRC will charge interest on the amount you owe. This interest accrues from the date the payment was due until the date you pay. Penalties may also apply if you are late filing your actual return.

What if I cannot afford to pay?

It is always better to contact HMRC immediately if you know you will struggle to pay on time. They may offer a Time to Pay arrangement, allowing you to spread the cost over a longer period. This prevents further penalties, though interest will usually still accrue on the unpaid balance you owe. You should seek advice from HMRC’s Payment Support Service, a qualified accountant, or business debt charities if you are in this position.

How are payments on account calculated?

Payments on account are calculated based on your total tax bill for the previous year. HMRC assumes you will earn the same amount this year as you did last year.

Therefore, each payment is exactly 50% of your previous year’s liability. Well in advance, you should use a tax calculator, such as the official HMRC tax calculator, to estimate the figure and prepare your finances.

What is a practical example of payments on account?

Imagine your total tax bill for the 2024/25 tax year was £10,000. You made a payment on account of £5,000 in January 2025, and another £5,000 in July 2025. If your actual liability remains £10,000, you have paid everything.

However, if your bill rises to £12,000, you will owe a balancing payment of £2,000 by 31st January 2026. At that same time, you must also pay your first payment on account for the 2025/26 tax year, which would be £6,000 (50% of £12,000). So, you would make a total payment on the 31st January of £8,000 (£2,000 + £6,000), and then the remaining £6,000 in the second payment on account on 31st July.

Why might the amount change?

If your circumstances change, for example, if business profits dip, or you have fewer freelance contracts, your calculated payments might be too high.

Conversely, if profits soar, you may have a larger balancing payment. This variability is why reviewing your position annually is essential.

Can I reduce my payments on account?

You can claim to reduce your payments on account if you know your tax bill will be lower than last year. This might happen if your business profits are down or if you have lost a significant client.

You can make this claim through your online tax account, or by post. Be careful, though. If you reduce the payments too much and end up underpaying, HMRC will charge you interest on the difference.

You will therefore want to get this right in order to avoid unnecessary costs. If you have already overpaid, you might be entitled to a tax refund, which HMRC will process after your final return.

How do I make the payments to HMRC?

You can make your payments to HMRC using various digital and traditional methods. The most common way is through online banking, or the HMRC app.

You can also use a debit card or corporate credit card. When you pay, you must use your Unique Taxpayer Reference (UTR) followed by the letter ‘K’, to indicate that the payment is specifically for Self Assessment (Income Tax). This will ensure the money is allocated to your account correctly. Funds will then usually clear instantly, or within three days, depending on the method.

Why use payroll software for tax management?

Using comprehensive UK payroll software allows businesses to maintain accurate records and forecast liabilities with precision.

For SMEs, manual calculations are inherently prone to error. An automated solution, on the other hand, will help you track expenses, manage P11D forms, and ensure you remain HMRC compliant.

For company directors, who often receive a mix of salary and dividends, the visibility offered by such technology is vital. Payroll software will accurately track the tax already deducted at source via PAYE. This figure is essential when calculating whether or not a director satisfies the ‘80% exemption’ for payments on account.

Furthermore, modern tools integrate with accounting platforms to combine salary and dividend data, allowing you to download comprehensive reports whenever needed. Such a seamless flow of information helps finance leaders forecast personal tax liabilities accurately, avoid cash flow surprises, and free up time for more strategic tasks.

What is the future outlook for payments on account in 2026 and beyond?

UK tax is shifting towards further digitalisation. Making Tax Digital (MTD) for Income Tax is set to be introduced in phases from April 2026.

This will require self-employed individuals and landlords with income over £50,000 to keep digital records and send quarterly updates to HMRC.

By April 2027, this threshold will drop to £30,000. Managers should view this as a signal to digitalise their systems now. Preparing early will make the transition much smoother, and reduce the administrative burden later on.

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