Payments on Account for Landlords

Payments on account are advance payments toward next year's Self Assessment tax bill, made alongside the bill you have just calculated for the year that has ended. If your total tax bill is over £1,000 and less than 80% of your tax is already collected at source (through PAYE, for example), HMRC normally requires two payments on account for the following year: half by 31 January, at the same time as your current bill, and the other half by 31 July.

This guide explains the mechanics, why a landlord's first tax bill after they start letting can feel like paying twice, how to work through a worked example, and what to do if your income has dropped and the payments on account no longer match reality.

How the mechanism works

Payments on account are not an extra tax. They are an estimate, based on your most recent tax bill, of what you are likely to owe for the year ahead, collected in two instalments so HMRC is not waiting a full year after that income arrives to receive any of the tax due on it.

The two instalments fall on:

• 31 January, alongside the balancing payment for the tax year that has just ended.
• 31 July, as the second instalment for the year ahead.

Once that year's actual figures are known, a final balancing payment or refund settles the difference between what you paid on account and what you actually owed. If your profit rose, you pay the shortfall on top of the following January's bill. If it fell, the excess is refunded or set against what you owe next.

Why the first bill is a shock

This system catches new landlords out more than almost anything else, because your first tax bill after you start letting property can be one and a half times the amount you were expecting. Say your calculated tax bill for your first full year of letting is £4,000. On 31 January you owe that £4,000 in full, plus a first payment on account of £2,000 (half of the same figure, as an estimate for the year ahead), a total of £6,000 due on the same date, followed by a second £2,000 payment on account by the following 31 July.

Nothing has gone wrong here. HMRC is simply asking you to start paying toward next year's bill at the same time as settling this year's, because it assumes, reasonably, that a landlord with a stable portfolio will owe a broadly similar amount again. The surprise comes from the timing, not from being overcharged, but it is a real cashflow event if you have not planned for it. Our tax on rental income guide covers how the underlying profit figure that drives this calculation is worked out in the first place.

A worked example across two years

Take a landlord whose rental profit produces a tax bill of £5,000 for their first full tax year of letting. On 31 January following the end of that year, they pay the £5,000 balance for the year just finished, plus a first payment on account of £2,500 (half of £5,000) toward the year ahead, a total of £7,500 in one payment. On the following 31 July, they pay the second payment on account of £2,500, bringing the total paid toward the second year to £5,000, matching the first year's bill as an estimate.

When the second year's actual figures are calculated, suppose profit has grown slightly and the real bill comes to £5,600. The landlord has already paid £5,000 toward it through the two payments on account, so the balancing payment due the following 31 January is the £600 shortfall, plus a new first payment on account of £2,800 (half of the new £5,600 figure) for the third year. The pattern continues each year, with the balancing payment reflecting how close last year's estimate was to reality, and each year's payments on account resetting to half of the most recently calculated bill.

If your income drops

If you know your profit for the current year will be meaningfully lower than last year, for example after selling a property, a long void period, or a large one-off repair bill, you do not have to keep paying instalments based on the old, higher figure. You can ask HMRC to reduce your payments on account to a more realistic estimate, either through your online Self Assessment account or on the relevant form, before the payment falls due.

This is worth doing properly rather than guessing low to ease cashflow. If you reduce your payments on account below what you actually go on to owe, HMRC can charge interest on the shortfall from the date the original payment was due, even though you asked to have it reduced. A rough but honest estimate of the current year's profit, based on rent, expenses and any known one-off items so far, is a far safer basis for a reduction request than an optimistic guess.

Planning around it

Landlords who avoid being caught out by payments on account generally do one or both of the following:

• Set aside a fixed percentage of every rent payment into a separate tax account, rather than waiting until January to work out what is owed. Building this into your monthly routine, using your actual profit rate rather than a rough guess, means both the balancing payment and the payments on account are already funded when the dates arrive.
• Forecast the following January and July early, once you have a reasonable estimate of the current year's profit, so the combined bill and first instalment due on 31 January is not a surprise figure discovered for the first time when your accountant sends the final return.

This matters more, not less, once you are within the scope of Making Tax Digital for landlords, since quarterly updates give you a running picture of profit through the year rather than one figure arriving in a single annual return, which makes an accurate mid-year estimate genuinely achievable rather than a guess. Our landlord Self Assessment guide covers the wider filing calendar these payments sit inside, and our landlord allowable expenses guide is worth checking before you forecast a bill, since missed expenses inflate the estimate you are planning around.

How PropMaps helps

PropMaps Studio is the modelling layer for this. Enter the property, the mortgage and the tax wrapper, then watch cashflow, cover and tax play out over years — instead of rebuilding a spreadsheet every quarter. Start with a free calculator or open the Studio.

Disclaimer

This guide is general information for UK landlords, not legal, tax or mortgage advice. Check GOV.UK, HMRC or a qualified adviser for your situation.