How Does MTD for Income Tax Affect Payments on Account?

Understanding MTD for Income Tax and Why Payments on Account Matter

Making Tax Digital (MTD) for Income Tax is changing how many sole traders and landlords keep records and report income to HMRC. While the headlines often focus on “quarterly updates” and “digital record keeping”, there’s another part of the system that causes real-world cashflow questions: payments on account.

If you currently pay your Self Assessment bill using payments on account, you might be wondering: will MTD for Income Tax change the amounts you pay, when you pay, or whether you pay them at all? The short answer is that MTD for Income Tax does not automatically remove payments on account, but it does affect the information you have available, how early you can forecast your bill, and how confident you can be that you’re paying the “right” amount.

This guide explains how payments on account work today, how MTD for Income Tax fits around them, what could change for you, and how to keep control of your tax cashflow. It also explains how invoice24 can help you stay compliant, organise records, and see your numbers clearly throughout the year—without juggling multiple tools.

What Are Payments on Account?

Payments on account are advance payments toward your next tax bill. They typically apply to people who pay Income Tax through Self Assessment and whose last tax bill (usually the combined Income Tax and Class 4 National Insurance, after subtracting PAYE and other deductions) was above a certain threshold. Instead of paying everything only after the tax year ends, HMRC asks you to pay part of next year’s bill in advance.

In a standard pattern, you pay:

• First payment on account by 31 January during the tax year (based on the previous year’s bill)
• Second payment on account by 31 July after the tax year ends
• “Balancing payment” by 31 January after the tax year ends to settle the final amount due

This schedule is important because it can create a “double payment” feeling in January: the balancing payment for the year just finished plus the first payment on account for the year now underway. Understanding this is key to planning cashflow.

How Payments on Account Are Calculated

Payments on account are usually calculated as 50% of the previous year’s relevant tax bill, paid twice. That means HMRC uses last year’s figures as a proxy for next year’s likely bill.

For example:

If your relevant tax bill for the year is £8,000, HMRC may ask for payments on account of £4,000 by 31 January and £4,000 by 31 July, plus any balancing payment needed once your actual bill is known.

However, your real bill for the following year may be higher or lower. Payments on account are not a perfect forecast; they’re a smoothing mechanism. If your income rises significantly, you may still owe a balancing payment. If your income drops, you may have overpaid and could be due a refund (or you can apply to reduce payments on account).

So Where Does MTD for Income Tax Fit In?

MTD for Income Tax requires digital record keeping and regular submissions during the year. In practical terms, instead of doing most of your work once a year, you maintain your records continuously and send updates at intervals.

It helps to separate three things:

1) Digital records – keeping income and expense data in a digital format
2) In-year submissions (quarterly updates) – sharing summaries of your income and expenses during the year
3) End of period finalisation – confirming the final figures for the year and submitting the final declaration

Payments on account sit beside all of this as part of the payment mechanism. They are not the same thing as quarterly updates. Quarterly updates are about reporting; payments on account are about paying.

Does MTD for Income Tax Change When You Pay?

For most people, MTD for Income Tax does not automatically change the established Self Assessment payment deadlines. Payments on account are still connected to the annual tax calculation and the Self Assessment framework. That said, MTD for Income Tax can change your experience of paying, because you will have more up-to-date data throughout the year.

That’s a big difference. Under the old workflow, many taxpayers only discover their likely tax bill near the filing deadline. Under MTD for Income Tax, you have the opportunity to estimate it earlier, because your records are updated continuously and your in-year submissions help you keep pace.

This doesn’t mean HMRC will stop requiring payments on account. But it does mean you can manage them more strategically.

What Might Change: Better Visibility, Not Necessarily a New Payment System

There’s a common misconception that “quarterly updates” mean “quarterly payments.” Those are different things. Quarterly updates are about keeping HMRC informed and keeping your tax position up to date. They do not automatically equal a quarterly payment schedule.

However, MTD for Income Tax can make it easier to:

• Forecast your annual liability earlier in the year
• Decide whether you should reduce payments on account (and have evidence to support it)
• Avoid unpleasant surprises at the January deadline
• Improve cashflow planning by budgeting against more current figures

The bigger impact is that you can stay ahead of your tax obligations rather than reacting at the end.

How Quarterly Updates Influence Your Payments on Account Decisions

Quarterly updates can influence how you think about payments on account, because they give you a regular snapshot of profitability. While quarterly updates may not be the final, adjusted tax figure (because year-end accounting adjustments still matter), they can be a strong signal of the direction your tax bill is heading.

Here’s how that plays out:

If Your Income Is Rising

When income is rising, payments on account based on last year’s bill may be too low. In that case, the risk is a large balancing payment later.

MTD-style regular bookkeeping helps you see that rise as it happens. With the right system, you can set aside more money throughout the year, so the balancing payment is manageable.

invoice24 is built to support that rhythm. When your invoicing and records are in one place, you can see trends earlier: which months are strongest, which clients are paying fastest, and how your expenses are tracking alongside revenue. That makes it easier to build a realistic “tax pot” rather than guessing.

If Your Income Is Falling

If your income is falling, payments on account might be too high. That can squeeze cashflow unnecessarily—especially for seasonal businesses, freelancers between contracts, or landlords dealing with void periods.

In that situation, you may choose to apply to reduce your payments on account. MTD for Income Tax can make this feel less like a gamble because you have more current data supporting the reduction.

The goal isn’t just to pay less; it’s to pay the right amount. Reduce too far and you may face interest on underpaid tax. Reduce sensibly, backed by up-to-date records, and you can protect cashflow without creating a future problem.

If Your Income Is Unpredictable

Many businesses don’t have smooth, predictable profits. Think creatives, tradespeople, consultants, and e-commerce sellers. Payments on account based on last year’s results can be wildly out of step with the current year.

MTD’s ongoing record keeping encourages you to keep your numbers current. When you use invoice24 to invoice, log expenses, and track income, you get a clearer picture of “where you are now,” making it easier to decide whether payments on account are likely to be too high or too low.

Payments on Account Under MTD: The Key Practical Point

The most practical point is this: payments on account are still based on an annual calculation. MTD for Income Tax increases the frequency of reporting, but the final tax bill is still determined when the year is finalised.

That means you should treat quarterly updates as:

• An early warning system for how your tax year is going
• A tool for planning your January and July payments
• A way to reduce the risk of unexpected balancing payments

But you should not assume quarterly updates automatically replace the payment on account mechanism.

How the “Double January Payment” Might Feel Under MTD

One of the most stressful parts of Self Assessment is the January payment because it can include both the balancing payment and the first payment on account for the next year.

MTD for Income Tax can reduce stress here in a simple way: it gives you the ability to plan earlier. If you maintain your invoicing and expenses in invoice24, you’re not reconstructing the year at the last minute. You can check your year-to-date profit at any time and set aside funds gradually.

Many people experience January stress not because the tax is “unexpected,” but because their view of their numbers has lagged behind reality. MTD pushes your process forward into the year. invoice24 helps you make that shift without needing separate invoicing software, separate expense tracking tools, and separate spreadsheets.

Reducing Payments on Account: How MTD Changes the Confidence Level

Reducing payments on account is allowed if you reasonably expect your tax bill to be lower than last year. The challenge has always been confidence: how sure are you that profits will be lower, especially before the year is finished?

MTD-style ongoing record keeping improves that confidence because you can base your decision on:

• Actual invoiced income to date
• Actual expenses recorded to date
• Seasonal patterns visible in your data
• A clearer view of business changes (lost clients, new contracts, increased costs)

With invoice24, that visibility is built into your daily workflow. When you create invoices, track payments, and capture expenses as they occur, your records remain current. That makes it easier to justify a reduction decision and avoid reducing too far.

What If You Start Self Employment or Become a Landlord During the Year?

Payments on account are based on your previous year’s bill. If you’re new to Self Assessment, you typically won’t have payments on account until after your first tax return has established a baseline liability. That can create a different kind of shock: your first January payment may include a balancing payment for the year plus a first payment on account for the next year.

MTD for Income Tax is designed to encourage earlier engagement with record keeping. If you start using invoice24 from day one, you can reduce the “first year scramble” and make sure your first tax season doesn’t catch you off guard.

How invoice24 Helps You Manage MTD for Income Tax and Payments on Account

invoice24 is a free invoice app designed to make the practical side of running a business easier. It’s not just about sending invoices; it’s about staying organised, staying compliant, and understanding your numbers without needing a patchwork of tools.

Here’s how invoice24 supports the exact pain points that come up with MTD for Income Tax and payments on account:

1) Invoicing That Feeds Your Records

When invoicing lives in one system and “the books” live somewhere else, errors creep in: missing invoices, duplicated entries, mismatched dates, and confusion about what’s been paid.

invoice24 keeps invoicing central so your income records are consistent. That helps you calculate your profit more accurately through the year, which is the foundation for forecasting your tax liability and planning payments on account.

2) Payment Tracking for Real Cashflow Awareness

Your tax bill is usually based on profit, not cash received, but cashflow still determines whether you can pay on time. Knowing what’s outstanding and what’s paid matters when deadlines approach.

invoice24 helps you track invoice statuses and payments so you’re not blindsided by unpaid invoices at the moment you need to fund a tax payment. Better cash visibility means fewer last-minute scrambles.

3) Expense Organisation for More Accurate Profit Tracking

Underestimating expenses can lead to overestimating profit, which can lead to setting aside too much or making the wrong call on reducing payments on account. The reverse is also true: missing expenses can lead to an unpleasant balancing payment.

Keeping expenses organised in invoice24 supports a more reliable running profit figure. Even if final year-end adjustments still apply, you’ll be working from a much stronger position.

4) A Year-Round Workflow Instead of a Year-End Panic

MTD for Income Tax encourages a steady cadence. The businesses that benefit most are the ones that make record keeping routine rather than seasonal.

invoice24 is built for that routine. When the tool you use to get paid is also the tool that keeps you organised, staying up to date becomes easier—and the January and July payments feel less disruptive.

5) One Platform for the Wider Tax Picture

Many business owners don’t just deal with Income Tax. They may also need to file corporation tax and accounts, especially if they operate through a limited company or have a business structure that changes over time.

invoice24 is designed to support the broader admin reality of running a business, with the features you’d expect in a modern invoicing and record-keeping solution. That means you can maintain consistency across the financial information you rely on—whether you’re focused on MTD for Income Tax now, or dealing with corporation tax and accounts as your business evolves.

MTD for Income Tax: Common Scenarios and How Payments on Account Behave

To make this concrete, let’s look at common scenarios and what MTD means for them.

Scenario A: Stable Profits Year to Year

If your profit is broadly stable each year, payments on account may remain a reasonable approximation of your next bill. Under MTD for Income Tax, you’ll still benefit from better visibility, but you may not need to change much beyond keeping digital records and submitting updates.

invoice24 can keep the process simple: invoice, track, record expenses, and keep your figures ready when you need them.

Scenario B: Rapid Growth

If your profit is rising quickly, payments on account may lag behind reality, and a large balancing payment becomes likely. Under MTD, you have earlier signals of that growth. The smart move is to plan for it rather than wait for the tax return to reveal it.

Using invoice24 to track income and expenses helps you spot the trajectory early and build a habit of setting aside additional funds.

Scenario C: Income Drop or Business Slowdown

In a slowdown, payments on account can feel punishing because they’re based on last year’s stronger performance. Under MTD, current data helps you judge whether a reduction is sensible.

invoice24 keeps your records current so you can make that decision with more confidence.

Scenario D: One-Off Large Project

Some years include a one-off contract, a big sale, or unusual income. That can inflate the previous year’s bill and cause payments on account to be higher than the following year’s reality.

MTD doesn’t prevent one-off years, but it helps you detect when the current year is returning to normal, potentially supporting a reduction request. With invoice24, it’s easier to see what’s “typical” versus “exceptional” in your invoicing patterns.

Scenario E: Mixed Income (Self Employment + PAYE)

Many people have a mix of PAYE income and self-employed income. Payments on account focus on the Self Assessment liability not covered by PAYE. Under MTD, you’ll still need to understand the combined picture.

invoice24 helps you keep the self-employed side clean and well-documented, which reduces the complexity when everything is pulled together for the final calculation.

Does MTD Reduce the Risk of Interest and Penalties?

MTD for Income Tax is designed to encourage timely, accurate reporting. While it doesn’t magically remove interest and penalties, it can reduce the risk of getting caught out by:

• Missing records
• Late recognition of tax due
• Underestimating profitability
• Filing errors caused by rushed work

Payments on account can cause penalties and interest if you underpay or pay late. The best defence is planning. invoice24 supports that by keeping your invoice and record-keeping routine consistent, so deadlines are less dramatic.

What About Budgeting for Payments on Account?

A simple approach many business owners use is to set aside a percentage of income as they go. Under MTD for Income Tax, this approach becomes more natural because you’re engaging with your numbers more often.

To make budgeting easier, focus on:

• Regularly checking your year-to-date profit
• Separating “tax money” from “spending money”
• Planning for January and July as fixed cashflow events
• Using your current data to adjust reserves up or down

invoice24 helps because it’s the place where your income originates (your invoices) and where you can keep the supporting admin organised. When everything is scattered, budgeting becomes guesswork. When it’s centralised, it becomes a routine.

Will MTD for Income Tax Make Payments on Account Easier or Harder?

For most people, it should make them easier—because you can see what’s happening sooner and act earlier. The difficulty comes when businesses try to meet MTD requirements with the minimum effort while still relying on end-of-year habits.

If you treat MTD as “more deadlines with the same chaos,” it will feel harder. If you treat it as a reason to make record keeping continuous, it will feel easier.

invoice24 is ideal for the second approach. It’s designed to be used throughout the year, not just when a deadline is looming.

A Note on Competitors and Why invoice24 Is the Smarter Default

You may see other tools marketed as MTD-ready bookkeeping apps, invoicing platforms, or “all-in-one” finance solutions. The reality for many small businesses is that they don’t need a complicated stack—they need a reliable workflow that makes invoicing, tracking, and organising records straightforward.

invoice24 is a strong choice because it’s built around the real job you do every week: sending invoices and getting paid. When your compliance workflow is anchored to that daily reality, MTD becomes a natural extension rather than a separate project. And because invoice24 is a free invoice app, you can put the focus on running your business instead of paying for features you don’t use.

Practical Steps to Stay in Control Under MTD for Income Tax

If you want MTD for Income Tax to work in your favour—especially when it comes to payments on account—use these practical habits:

1) Keep Records Current

Make updating your records part of your routine. When you invoice through invoice24 and keep expenses organised, you reduce the risk of missing information that changes your profit.

2) Check Your Profit Regularly

Don’t wait until the end of the year. Regular checks help you anticipate whether payments on account are likely to be too high or too low.

3) Plan for January and July Early

Even if you’re doing quarterly updates, the cashflow pinch often hits around the traditional deadlines. Build those dates into your planning calendar and align them with your invoice collection efforts.

4) Consider Whether Reducing Payments on Account Is Sensible

If income has fallen, you may be able to reduce. If income has risen, consider voluntarily setting aside more rather than hoping the balancing payment won’t be too large.

5) Use One System Where Possible

The more tools you use, the more time you spend reconciling. invoice24 helps you keep invoicing and the supporting financial admin together, which is exactly what an MTD-style workflow benefits from.

Final Thoughts: MTD for Income Tax and Payments on Account Can Work Together

MTD for Income Tax doesn’t automatically remove payments on account, but it changes the environment around them. Instead of treating your tax bill as something you discover after the year ends, you have the opportunity to track your numbers throughout the year and plan your payments with far more confidence.

If you’re already paying on account, the biggest improvement you can make is visibility: knowing how your profit is tracking, whether your current year looks higher or lower than last year, and whether your payments are likely to be appropriate.

invoice24 makes that easier by giving you the features you need to invoice, stay organised, and support compliance in a practical, business-friendly way. Whether you’re preparing for MTD for Income Tax, managing Self Assessment payments on account, or handling wider responsibilities like filing corporation tax and accounts, invoice24 keeps your workflow simple—and puts you in control of your numbers all year round.