Payment on account trap for a partner with a falling profit share
Beth and Carl are equal partners in a design partnership, preparing accounts to 31 March. For the year to 31 March 2024 the partnership profit was £160,000, so each partner's share was £80,000. For the year to 31 March 2025 the profit fell to £96,000, giving each partner £48,000. Each partner has no other income and claims the standard personal allowance. Beth's tax for 2023/24, calculated on her £80,000 share, was £22,432 and she paid it through payments on account of £11,216 each on 31 January 2024 and 31 July 2024, with a balancing payment on 31 January 2025. Carl, by contrast, had a large dividend in 2023/24 and his payments on account were set at a much higher level. The partnership's self-assessment return for 2024/25 was filed on 20 December 2025.
1. Explain how payments on account for 2024/25 are determined and whether Beth's January 2026 payment is correctly based on her 2023/24 liability.
Read the worked answer
Payments on account for a tax year are based on the previous year's liability, unless the taxpayer claims to reduce them. For 2024/25, the payments on account are each 50% of Beth's 2023/24 liability (excluding amounts collected at source such as PAYE).
Beth's 2023/24 liability was £22,432, so each payment on account for 2024/25 is £11,216 - payable 31 January 2025 and 31 July 2025. The second payment on account (31 July 2025) is therefore not based on her 2024/25 profit of £48,000.
This is the trap. Because her profit fell from £80,000 to £48,000, the payments on account of £11,216 each total £22,432, whereas her actual 2024/25 liability will be far lower. She will therefore have overpaid and be due a refund, but only after the return is filed and processed.
Beth could have claimed to reduce her payments on account before 31 July 2025 by estimating her 2024/25 liability, which would have improved her cash flow. She did not, so she has effectively made an interest-free loan to HMRC.
2. Calculate Beth's balancing payment or repayment for 2024/25, and state the due date and any interest consequence.
Read the worked answer
2024/25 liability. Trading profit £48,000, less personal allowance £12,570 = £35,430 taxable. Income tax: £35,430 × 20% = £7,086. Class 4 NIC: 6% on profits between £12,570 and £50,270, so £48,000 − £12,570 = £35,430 × 6% = £2,125.80. Class 2 NIC is treated as paid where profits exceed the small profits threshold. Total ≈ £7,086 + £2,126 = £9,212.
Payments made. £11,216 + £11,216 = £22,432.
Balancing position. £9,212 − £22,432 = repayment of £11,220 due to Beth.
The repayment arises when the 2024/25 return is processed. The return was filed on 20 December 2025, before the 31 January 2026 deadline, so no late-filing penalty applies. Interest on overpaid tax is generally paid by HMRC from the date the return is filed (or the due date, whichever is later) - but the candidate should note that HMRC does not pay interest on overpayments arising from payments on account until the return is filed.
Forward look. Her payments on account for 2025/26 will be based on her 2024/25 liability of £9,212, i.e. £4,606 each - a much lower level, which corrects the position.
3. Carl's payments on account were set high because of a one-off dividend. Advise him on the mechanism available and one risk of using it.
Read the worked answer
Mechanism. Carl can claim to reduce his payments on account for the year by submitting a claim (usually via the self-assessment return or a standalone claim) estimating that his liability for the year will be lower than the previous year's. HMRC will then reduce the payments.
Risk. If the claim to reduce is made and the actual liability turns out to be higher than the reduced amount, HMRC can charge interest on the underpaid tax from the original due date, and potentially a penalty if the claim was made fraudulently or negligently. The reduction is therefore only safe if the estimate is reliable.
Additional point. A one-off dividend in 2023/24 inflates the payments on account for 2024/25 even though the dividend is not repeated. Carl should identify the non-recurring element and claim to reduce by at least that amount, while leaving a margin for the trading profit. If he simply waits for the balancing payment, he ties up cash for up to 12 months. The judgement the examiner tests is whether to claim the reduction (cash-flow benefit, interest risk) or accept the overpayment (certainty).