How Does Payment on Account Work? 2026/27 UK Tax Guide

For tax professionals advising clients during the 2026/27 tax year, understanding exactly “how does Payment on Account work” is critical. The system is designed to collect tax in advance of the final self-assessment filing deadline, but it intersects with new digital reporting mandates and a newly overhauled penalty regime.

Under section 59A of the Taxes Management Act 1970 (TMA 1970), payments on account act as advance instalments towards the taxpayer’s final income tax liability.

The Baseline Calculation and Due Dates

HMRC automatically calculates payments on account based on the taxpayer’s previous year’s tax return. Each payment on account is normally equal to half the income tax and Class 4 National Insurance Contributions (NIC) liability for the previous tax year.

Crucially, Capital Gains Tax is strictly excluded from the calculation of payments on account.

Taxpayers must pay these advances in two equal instalments:

1. First Payment: Due on 31 January within the current year of assessment.
2. Second Payment: Due on 31 July immediately following the year of assessment.

A final balancing payment, which settles any remaining income tax and covers the entire Capital Gains Tax liability for the year, is then due on the following 31 January, at the same time the final tax return is due.

Statutory Exemptions: When Do You Not Have to Pay?

The law does not require every taxpayer to make advance payments. A taxpayer is completely exempt from the payments on account regime if they meet either of the following conditions:

• The £1,000 Threshold: Payments on account are not required if the amounts calculated from the previous year’s total tax liability fall below £1,000.
• The 80% Rule: You do not need to make payments on account if 80% or more of your total tax liability for the previous year was already deducted at source, such as through the PAYE system.

Adjusting Your Payments (Form SA303 and MTD for ITSA)

If a taxpayer anticipates a drop in their trading profits or property income, they are not locked into paying the full instalment amount based on a highly profitable previous year.

Taxpayers may proactively make a claim to reduce their payments on account (often via form SA303 or the HMRC online portal).

The Making Tax Digital (MTD) Advantage: From 6 April 2026, sole traders and landlords with a turnover exceeding £50,000 are legally mandated into the Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) regime.  This fundamentally changes how taxpayers monitor their liability. Under MTD, taxpayers must submit quarterly digital updates to HMRC (due 7 August, 7 November, 7 February, and 7 May).

Following each submission, the MTD software automatically generates an estimate of the final tax bill.  This live estimation tool empowers taxpayers to make accurate, data-driven claims to reduce their payments on account mid-year, rather than relying on guesswork.

Warning on Excessive Reductions: If a taxpayer reduces their payments on account too drastically, and their final tax liability turns out to be higher than the reduced instalments they paid, HMRC penalises the shortfall. Late payment interest is backdated and calculated on the difference between the payment on account the taxpayer should have paid and what they actually paid, running from the original 31 January and 31 July due dates.

HMRC’s Collection Powers: The 2026/27 Penalty and Interest Regime

If a taxpayer fails to pay their payments on account by the statutory deadlines, HMRC applies strict financial sanctions. For the 2026/27 tax year, the government has overhauled how these charges apply.

1. Late Payment Interest (The Base + 4% Rate)

From 6 April 2025 onwards, HMRC increased the statutory late payment interest rate.  Interest is now charged on late paid tax at the Bank of England base rate plus 4 percentage points.  This elevated rate applies to all outstanding and future amounts of unpaid tax, explicitly including late payments on account.

2. Staged Late Payment Penalties

Alongside interest, HMRC enforces a staged, percentage-based penalty regime for late payments:

• 0 to 15 Days Late: No penalty applies if the taxpayer pays the balance in full or agrees to a Time to Pay arrangement within 15 days of the due date.
• 16 to 30 Days Late: A penalty is calculated at 2% of the outstanding balance, provided payment is made or a Time to Pay arrangement is agreed in this window.
• Day 31 Onwards (The Second Charge): If the tax remains unpaid at day 31, HMRC levies a 2% charge on what was due at day 15, plus a further 2% on the balance still due at day 30.  Furthermore, a secondary daily penalty begins to accrue on the outstanding balance at an annualised rate of 4%.

Taxpayers can prevent the daily penalty from accruing by formally proposing a Time to Pay arrangement to HMRC; if accepted, the penalty stops accruing from the date the proposal was made.

Summary of the Payment on Account Cycle

Next steps for research: Verify the exact mechanical steps required to submit a digital claim to reduce payments on account via the approved MTD for ITSA software programming interfaces, and review the statutory appeal process for challenging late payment penalties under reasonable excuse provisions.