The end of January is the prime time for filing and paying taxes, so we wanted to examine paying taxes under Self-Assessment, particularly Payments on Account, which catch many people out.
So, starting with some basics.
First, who is in the scope of Self-Assessment? Sole Traders, Partners (LLP or conventional), company directors/shareholders, landlords, and others with more complex tax affairs, including income over £150,000.
HMRC gives a helpful list here – https://www.gov.uk/self-assessment-tax-returns/who-must-send-a-tax-return
If you operate via a limited company, PAYE will be applied to your director’s salary, and dividends are paid on profits after Corporation Tax – however, Dividend Tax, an additional surcharge on dividends, falls into Self Assessment. All sources of income need to go on the Self Assessment, including Director’s Salary, Dividends, interest from savings accounts – private ones, not ones in the company name, rents, sundry income. However, your company is completing a separate return, under Corporation Tax Self Assessment, for its income and profits – remember a company and its owners are separate at law.
An interesting anomaly is around people who have tax to pay, but don’t have to submit a Self Assessment. For example, Savings Income, generally Bank / Building Society Interest; the HMRC website suggests you must submit a Self Assessment if you have savings income over £10,000, but If you are a Basic Rate Tax Payer, you only get an allowance of £1,000 of savings income tax-free (the allowance is £500 if you are a Higher Rate tax payer, and £0 if you are an Additional Rate taxpayer) – how are those with over £1,000 of Savings Income but less than £10,000 taxed? Well, they may be in Self Assessment for another reason, but if not, apparently “HMRC will tell you if you need to pay tax and how to pay it.” (from their website) – this takes us into the realm of HMRC Simplified Assessing, the process where they acquire information from other sources and use it to assess the taxpayer, rather than asking for a Self Assessment.
Another anomaly is that HMRC doesn’t want you to send a Self Assessment if you receive rents of up to £2,500, but there is only a £1,000 exemption via the Trading and Property Allowance – so if you have rents between £1,000 and £2,500 you are expected to call HMRC and tell them, rather than register for Self Assessment. Similarly, HMRC expects you to tell them if you have dividends over £2,000, whereas the Divided Allowance is only £500.
To be honest, in all these cases registering for, and submitting, a Self-assessment is probably simpler and more transparent. It has to be asked whether a USA-style system where more or less everyone files a return each year may be easier, if only to improve tax literacy in the UK and give a level playing field.
Anyway, back to those who have to submit a Self Assessment – what’s the significance of 31st January? Threefold:
- The latest filing date for the previous year’s taxes, eg 31st January 2025 for the 2023-24 tax year (6th April 2023 to 5th April 2024).
- You pay the balance of your tax for the previous year, eg 31st January 2025 for the 2023-24 tax year.
- You make, potentially, a first Payment on Account (POA) for the next tax year, eg 31st January 2025 first 50% POA for 2024-25. A second 50% will be due on 31st July 2025.
Let’s have a further look at a couple of issues around Payments.
First, what if you can’t pay? Always a worry. HMRC has some advice, https://www.gov.uk/difficulties-paying-hmrc. You can self-serve with HMRC and set up a payment plan online if you owe less than £30k, and are within 60 days of the payment due date. Outside of those parameters you’ll need to contact HMRC.
Second, how do you pay? Again – HMRC has some help https://www.gov.uk/pay-self-assessment-tax-bill. I paid my tax bill very easily via a QR code on the HMRC website – logged in, of course, to avoid fraud risks, which took me to my online banking app, and was sent an instant receipt.
Finally, fraud risk – as touched on above. As 31st January is a prime tax filing and payment time, expect an uptick in scam emails, texts, and WhatsApps around making payments. Always check that the communication is genuine, and that you are logging on to the genuine HMRC website – don’t give away sensitive information by email.
Now, let’s look at Payments on Account – POAs – as these are a perennial source of confusion and frustration.
The first thing people always ask about making POAs is “Where did you get that estimate from?” followed by “Why is the Government asking me to pay in advance; it’s unfair when I haven’t earned it!”. So, let’s clear these points up:
The normal due date for tax under Self Assessment is 31st January after the end of the tax year, eg 31st January 2026 for the 2024-25 tax year (6th April 2024 to 5th April 2025). So you are normally paying 10 months after the end of the tax year, and 22 months since the start of the tax year. – that’s a fair bit in arrears.
If you are required to make POAs then this moves the payment forward 12 months, so for the current 2024-25 tax year, your first 50% POA is 31st January 2025, 10 months after the start of the tax year, when you should have earned 10 months of income. The second POA is 31st July, 4 months after the end of the tax year – so there is no element of paying in advance, just an accelerated payment timetable compared to the normal 10 months after the end of the tax year.
Returning to that first question, “Where did you get that estimate from?” which is often pointed at HMRC, or at accountants completing clients’ returns, the answer is, it is automatic. The rule is straightforward if approached logically:
- You are liable to make POAs if your previous year’s total Self Assessment bill was more than £1,000
- However, there is an exemption if 80% of your tax is paid at source (eg you have a mixture of PAYE and non-PAYE income)
- POAs are automatically set by law at 50% x last year’s assessment total, excluding CGT.
- POAs are set by law to be made on 31st January during the tax year, which is of course the same time as you are paying any balance for the previous year, and 31st July after the tax year.
- The two POAs are then offset against the final, calculated payment due in the following January, eg on 31st January 2026 you are due to pay your 2024-25 taxes, but this will be reduced by any POAs made on 31st January 2025 and 31st July 2025. On that date you therefore pay any remaining balance, and also make your first POA for 2025-26.
- If you are expecting next year’s income to be lower than this year’s, then you can apply to reduce the POAs so you don’t overpay. However, conversely, you don’t have to increase them if you think you will earn more.
The main issue with POAs, particularly for the Self-employed – Sole Traders and Partners – is they amplify changes in profits, making for significant swings in tax payments. There are also problems that they can lead to bunching of tax liabilities and take people by surprise.
Let’s look at some examples of this.
- Example 1 – Suppose Pat is Self-employed and their profits are such that their tax bill is a stable £10,000 per annum. If they have been in business for a long time then they will have settled down to £5,000 payments every six months. That’s easy!
- Example 2 – Suppose Pat’s business is new in April 2023. Years one and two the tax charges are £10,000. On 31st January 2025 Pat will have to pay £15,000 – the final balance for 2023-24 and 50% 1st POA for 2024-25.Pat needs to pay a further £5,000 in July 2025, which is the 2nd POA for 2024-25, and will then settle down to £5,000 every six months. Pat’s payment on 31st January 2026 will comprise £10,000 for 2024-25, less two POAs of £5,000 each, meaning the balance is £nil, and then they will pay the 1st POA of £5,000 for 2025-26.
- Example 3 – Suppose Pat has been going for some years with a tax bill of £10,000 each year, but then has an exceptional 2024-25 business year when their tax bill increases to £20,000 for a year, before returning to £10,000 the following year.
On 31st January and 31st July 2025, Pat will have made POAs of £5,000 each, based on 2023-24.
On 31st January 2026, Pat will need to pay their 2024-25 tax bill of £20,000 less £10,000 POAs = £10,000, plus a first POA for 2025-26 of £10,000 (half of 2024-25 final bill) – so £20,000 in total.
On 31st July 2026 Pat makes another POA of £10,000.
On 31st January 2027, Pat’s final, calculated tax bill for 2025-26 is back to £10,000 – so they pay £10,000 final tax bill for 2025-26, less 2 x £10,000 POAs paid = credit £10,000. First POA for 2026-27 is £5,000 – net total overpaid is therefore £5,000, which is paid back to Pat.
On 31st July 2027 Pat makes a second 2026-27 POA of £5,000 and then continues at £5,000 each six months so long as there are no variations in profits.
It can be seen that the one-year blip in profits creates a significant fluctuation in tax payments.
- Example 4 – As example 3 but on 31st January 2026 Pat knows that 2024-25 was exceptional, and makes a claim to reduce the 2025-26 POAs – to support this, Pat has good information from their accounting system, their bookkeeping is up to date, and they have sought advice from their accountant. Let’s pick up the story:
On 31st January 2026, Pat will need to pay their 2024-25 tax bill of £20,000 less £10,000 POAs = £10,000 plus a first POA for 2025-26 of £5,000 – the reduced amount – so £15,000 in total.
On 31st July 2026 Pat makes another POA of £5,000.
On 31st January 2027 Pat’s final tax bill for 2025-26 is back to £10,000 a year – so they pay £10,000 final tax bill for 2025-26, less 2 x £5,000 POAs paid = £nil. First POA for 2026-27 is £5,000, which Pat pays.
On 31st July 2027 Pat makes a second 2026-27 POA of £5,000, and then continues at £5,000 each six months so long as there are no variations in profits.
So, claiming to reduce the POAs has eased the fluctuations in tax payments, and hopefully made things easier for Pat.
- Example 5 – Suppose Pat has been going for some years with a tax bill of £10,000 a year, and then makes some investment in new equipment in the 2024-25 business year, resulting in their tax bill decreasing to, say, £900 that year due to Capital Allowances.
On 31st January and 31st July 2025, Pat will have made POAs of £5,000 each, based on 2023-24.
On 31st January 2026, Pat will need to pay their 2024-25 tax bill of £900 less £10,000 POAs = £9,100 overpaid. No POAs are due in January or July 2026, as the 2024-25 tax was less than £1,000. HMRC repay the £9,100.
Of course, if Pat knew 2024-25 was going to have a lower tax bill, they could have applied to reduce the POAs in January and July 2025 to reflect this, which would have saved paying money to HMRC and later reclaiming it.
On 31st January 2027, Pat’s final tax bill for 2025-26 is back to £10,000 a year – so they pay £10,000 final tax bill for 2025-26, plus a £5,000 POA for 2026-27, a total of £15,000.
Pat needs to pay a further £5,000 in July 2027, 2nd POA for 2026-27, and will then settle back down to £5,000 every six months.
This all goes to show how variations in profits create fluctuations in tax payments.
How can you make the process easier? A couple of accountant tips:
First, make sure you get your taxes done on time. Leaving them to December or January is a sure-fire way to get a surprise, sometimes a nasty one. Getting taxes done in the summer gives you ample time to budget for the payments coming up.
Secondly, as POAs cause fluctuations in the amount due, it’s important to plan and set money aside. Putting a tax provision aside in a high-interest account on a monthly basis makes a lot of sense and ensures you aren’t caught out. Some accounting software will estimate tax bills for you, otherwise your accountant should be able to give you a simple spreadsheet.
A final reflection – anyone who has been around since Self Assessment came in in 1997 will recall Hector the Inspector, and HMRC’s message that “Tax doesn’t have to be Taxing”. Many people reading this would disagree…