Payments on account under MTD for Income Tax

Q: How does this look in a first MTD year?

Illustration only. A sole trader joins MTD on 6 April 2026. Her 2025 to 2026 bill, with no tax deducted at source, is £8,000, so her payments on account for 2026 to 2027 are £4,000 on 31 January 2027 and £4,000 on 31 July 2027. After her second update the software estimate for 2026 to 2027 is £5,000. She claims to reduce each payment to £2,500 and pays those amounts. Her 2026 to 2027 return, filed through MTD software, shows a liability of £7,000. She owes a balancing payment of £2,000 by 31 January 2028. Interest is worked out as if each payment on account had been £3,500 (£2,500 plus half of £2,000, which is less than the original £4,000), so she pays interest on £1,000 from each original due date. No late payment penalty applies to the underpaid payments on account themselves, but one would apply to the £2,000 if she paid it late.

Making Tax Digital for Income Tax does not change how or when you pay. Payments on account are still due on 31 January and 31 July, each normally half of the previous year’s Self Assessment bill, with a balancing payment on the following 31 January. Quarterly updates are not payments and do not alter the amounts due, but the tax estimate they produce can support a claim to reduce payments on account. The new MTD late payment penalties apply to balancing payments, not to payments on account, although interest still runs on late payments on account.

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Does joining MTD change when I pay tax?

No. HMRC’s guidance on using MTD for the first time says you still submit one tax return a year and pay your tax bill as you do now, both by 31 January following the end of the tax year. Its guidance on submitting the return goes further: “Making Tax Digital for Income Tax will not change the way you pay tax or the dates that payments are due.”

That is because the payment rules sit in the Taxes Management Act 1970, which MTD did not replace. Section 59A sets the payments on account and section 59B the balancing payment, and both work from the self assessment in the return.

How are payments on account worked out?

Section 59A applies when your previous year’s self assessment exceeds the income tax deducted at source. That excess is the “relevant amount”, and each payment on account is 50% of it, due on 31 January in the tax year and 31 July after it. GOV.UK says they include Class 4 National Insurance if you are self employed, and that you do not have to make them if:

your tax bill for the previous year was less than £1,000; or
more than 80% of the previous year’s tax was paid outside Self Assessment, for example through your tax code.

For a fuller explanation of the general rules, see Self Assessment payments on account.

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Do quarterly updates change what is due?

No. The amount of each payment on account is fixed by reference to the previous year’s assessment. Under section 59A(4A), it changes only if that earlier assessment is made or amended after the payment date. Nothing in a quarterly update for the current year alters it.

What the updates do provide is an early view. HMRC says that after each update you can see an estimate of your tax bill for the year to date in your software and your HMRC online account, including information HMRC already holds such as PAYE income. It warns that the estimate will be less accurate if you have other income you have not added, or if your accounting period does not match the tax year.

Can I use the quarterly estimate to reduce my payments on account?

Yes, if the estimate gives you grounds. Section 59A(4) lets you claim, before 31 January following the tax year, that your liability will be lower than the relevant amount, stating your grounds; each payment on account then becomes half of the stated figure. Section 59A(3) allows a claim that no payments are needed at all because your tax will be covered by tax deducted at source. In practice the claim is made online or on form SA303; see reducing payments on account with form SA303.

Two safeguards limit this. Section 59A(6) allows a penalty if you fraudulently or negligently make an incorrect statement in the claim. And under section 86(4) and (5), if a balancing payment later becomes due, interest is charged as if each payment on account had been the lower of the reduced figure plus half the balancing payment, or the amount originally due. A mid year estimate built on two quarters of untaxed figures, before any year end adjustments, is a weak basis for a large reduction.

How does the balancing payment work under MTD?

Section 59B makes the difference between the tax in your self assessment and your payments on account (plus tax deducted at source) payable, or repayable, normally on 31 January after the tax year. HMRC says the information in your MTD return generates your Self Assessment bill for that year.

One difference applies if you have overpaid. HMRC’s MTD guidance says you cannot claim a refund in a return submitted through MTD software. Instead you request it through your HMRC online services account, or your agent requests it through the agent services account and supplies your bank details.

Which late payment penalties apply?

MTD brings new late payment penalties, but HMRC’s penalty guidance says they apply to balancing payments and to amounts due after an amendment or assessment, and do not apply to payments on account. For the 2026 to 2027 tax year, nothing is charged if you pay within 15 days; a penalty of 3% of the tax owed at day 15 applies after that, with a further 3% of the tax owed at day 30 and a yearly rate of 10% charged daily from day 31. For 2027 to 2028 the two percentages rise to 4%. In your first year of the new penalties you have 30 days to pay or arrange a payment plan before penalties start. See late payment penalties under MTD.

Interest is separate. Section 86 charges interest on a payment on account from its due date until it is paid, so paying late is still costly even without a penalty; see HMRC late payment interest.

Can I pay in instalments instead?

You can pay towards your bill before the deadline. GOV.UK describes a Budget Payment Plan of weekly or monthly payments, where you can estimate your next bill to decide how much to pay; if the payments fall short you pay the difference, and if you are in credit you can ask for a refund. The MTD estimate after each update can help set the amount. If you cannot pay on time, HMRC says contacting it promptly to agree a payment plan pauses late payment penalties from the date you made contact, as long as you keep to the plan; see Time to Pay arrangements.

How does this look in a first MTD year?

Illustration only. A sole trader joins MTD on 6 April 2026. Her 2025 to 2026 bill, with no tax deducted at source, is £8,000, so her payments on account for 2026 to 2027 are £4,000 on 31 January 2027 and £4,000 on 31 July 2027. After her second update the software estimate for 2026 to 2027 is £5,000. She claims to reduce each payment to £2,500 and pays those amounts.

Her 2026 to 2027 return, filed through MTD software, shows a liability of £7,000. She owes a balancing payment of £2,000 by 31 January 2028. Interest is worked out as if each payment on account had been £3,500 (£2,500 plus half of £2,000, which is less than the original £4,000), so she pays interest on £1,000 from each original due date. No late payment penalty applies to the underpaid payments on account themselves, but one would apply to the £2,000 if she paid it late.

What mistakes come up?

Thinking quarterly updates are quarterly tax payments. They are reports; payment dates are unchanged.
Reducing payments on account on an early estimate that ignores other income or year end adjustments.
Assuming no cost to paying a payment on account late because the new penalties do not apply. Interest still runs.
Expecting a refund to arrive automatically from the MTD return, instead of requesting it.
Forgetting that the first January in MTD can include a balancing payment for the last pre MTD year as well as the first payment on account.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.