Millions face surprise HMRC bill as accountants warn taxpayers are still confused by July deadline
Millions of self-employed workers, landlords and other Self Assessment taxpayers are being urged to check whether they need to make an HMRC payment before the 31 July deadline, as accountants warn that one of the UK’s most misunderstood tax rules continues to catch people by surprise.
While many taxpayers are familiar with the main Self Assessment deadline on 31 January, fewer are aware that a second payment may be due just six months later. Known as a “payment on account”, this advance payment towards the following year’s tax bill can leave taxpayers facing a larger-than-expected bill if they have not planned.
According to Oxfordshire-based chartered accountants Ridgefield Consulting, confusion surrounding payments on account remains one of the biggest causes of unexpected tax bills and cashflow difficulties, particularly for people who are newly self-employed, landlords, freelancers and those earning additional income through side businesses.
Simon Thomas, managing director of Ridgefield Consulting, commented on the matter: “Every year we see business owners, landlords and self-employed workers experiencing the stress of an unexpected HMRC bill, particularly where payments on account increase what they’re expecting to pay.
“The key issue is often cashflow rather than compliance. People aren’t necessarily doing anything wrong; they simply haven’t planned for how the system works or realised another payment is due in July.
“The good news is there are practical, legitimate ways to make tax payments more manageable and reduce that pressure, whether that’s budgeting throughout the year, reviewing whether payments on account are still accurate or speaking to HMRC early if you’re struggling to pay.”
Who needs to make Payments on Account?
Payments on account generally apply to taxpayers whose Self Assessment tax bill exceeds £1,000 and where less than 80% of their tax has already been collected at source, such as through PAYE.
Each payment is normally 50% of the previous year’s tax liability. The first instalment is due on 31 January alongside any balancing payment owed for the previous tax year, with the second instalment due on 31 July. After both payments have been made, any remaining tax due is settled through a balancing payment once the final liability is calculated.
Why payments on account can cause unexpected bills:
Payments on account are one of the most misunderstood parts of the Self Assessment system because they involve taxpayers paying in advance towards a future tax bill before they have submitted that year’s return.
For example, a taxpayer with a £5,000 Self Assessment liability may not simply pay £5,000 in January. They could also be required to make a £2,500 payment on account towards the upcoming year’s tax bill, followed by another £2,500 instalment in July.
Ridgefield Consulting says this can create cash flow pressure, particularly for people who are filing for the first time or whose income has grown quickly, as they may not be prepared to pay for both their outstanding tax bill and an advance payment towards the next one.
Ahead of the deadline, Ridgefield Consulting is advising taxpayers to take action early and consider the following:
- Check whether this applies to you: If you are registered for Self Assessment, it is advisable to review your online account or speak to your accountant to confirm whether the July deadline applies to you. Not everyone completing a Self Assessment return will need to make these advance payments.
- Understand what the July payment covers: Many taxpayers are surprised by the July deadline because they believe their January payment settled their tax bill. In reality, the July instalment is usually the second payment towards the following year’s estimated tax liability, rather than a payment for the previous tax year.
- Review whether your circumstances have changed: If your income has fallen compared with the previous year, business profits have reduced, or a source of income has stopped, you may be able to apply to reduce your payments on account. However, this should be based on a realistic estimate of your expected tax liability, as reducing payments too far could result in a larger balancing payment, interest being charged, and potential penalties if HMRC considers the reduction was made carelessly or without a reasonable basis.
- Budget for future tax bills: Setting aside money regularly throughout the year can help avoid unexpected financial pressure when HMRC deadlines arrive, particularly for those with fluctuating income due to seasonal changes, growing businesses or multiple income sources.
- Act early if you cannot pay in full: If you are aware you may not be able to meet the deadline, you should contact HMRC as soon as possible. A Time to Pay arrangement may allow eligible taxpayers to spread their liability into instalments, helping ease the pressure and prevent the situation from escalating.
Simon Thomas added: “Payments on account are designed to help taxpayers spread their tax liabilities, but they can create challenges when people are not aware of how the system works or have not planned for the additional payment.
“As the July deadline approaches, taxpayers should review what they owe, consider whether their circumstances have changed and seek advice or support early if they have concerns. Taking action before the deadline can help avoid unnecessary financial pressure.”