Skip to content

Taxation (UK) · The comprehensive computation of taxable income and income tax liability

Income Tax Payable, Payments on Account and Interest in TX-UK

Updated 11 October 2026 · Fact-checked

Income tax payable is your total income tax liability less tax already deducted at source, such as PAYE. Payments on account are two advance payments, each 50% of last year's net income tax and Class 4 NIC. Interest runs from the due date: 8.50% on underpaid tax and 3.50% on overpaid tax.

Understand Tax Payable, Payments on Account and Interest

The income tax computation ends with the income tax liability. That is not always the cash you pay. Some tax has usually been paid already, so the last step is to work out what is still due, or what HMRC owes back.

The main deduction is tax deducted at source. For most people this is PAYE taken from employment income. Deduct it from the liability to reach income tax payable. If the deduction is bigger than the liability, the answer is a repayment. Only deduct tax that is actually given in the question.

Self-employed people and others who pay by self assessment may also make payments on account. These are two instalments paid towards the current year's bill, based on last year's figures. After the year ends, you compare what was paid with the actual bill. The difference is the balancing payment, or a repayment.

Tax paid late costs interest. The rate on underpaid tax is higher than the rate on overpaid tax. The exam gives you these rates, so your job is to apply them to the right amount for the right number of months.

Key rules to remember

Income tax payable
Income tax liability − tax deducted at source (PAYE etc.) = income tax payable (or repayable)
A negative answer is a repayment. Only deduct tax shown in the question.
Each payment on account
50% × (prior year income tax liability − prior year tax deducted at source + prior year Class 4 NIC)
Two equal payments: 31 January in the tax year and 31 July after it. Class 2 NIC and capital gains tax are not included.
When payments on account are not required
Prior year net amount < £1,000, or prior year tax deducted at source ≥ 80% of the prior year income tax liability
If either test is met, no payments on account are due. The net amount for the £1,000 test is the income tax liability less tax deducted at source, not including NIC.
Balancing payment
Actual net liability for the year − payments on account made
Due 31 January following the end of the tax year. Class 4 NIC is included in the actual net liability. Capital gains tax is also due on 31 January.
Interest rates (assumed in the exam)
Underpaid tax 8·50%; overpaid tax 3·50%
Interest on underpaid tax runs from the due date to the date of payment. Official rate for benefits is a separate 3·75%.
Interest calculation
Unpaid tax × rate × months late ÷ 12
Round to the nearest £. Count whole months unless the question gives days.

How to solve Tax Payable, Payments on Account and Interest questions

Use this order for any question that asks for tax payable, repayable, payments on account or interest.

  1. 1Finish the income tax computation first and write down the total income tax liability, using the rates and bands for the tax year.
  2. 2List the tax deducted at source that the question gives, mainly PAYE. Deduct it from the liability to get tax payable or repayable.
  3. 3Add Class 4 NIC if the question asks for the total amount payable under self assessment. Do not deduct Class 2 or add it to payments on account.
  4. 4For payments on account, take the previous year's income tax liability, deduct its tax deducted at source and add its Class 4 NIC. First check the £1,000 and 80% tests.
  5. 5Halve the figure. Pay one half on 31 January in the tax year and one half on 31 July after it.
  6. 6After the year, subtract payments on account from the actual net liability. The result is the balancing payment due on 31 January, or a repayment.
  7. 7If tax is paid late, use 8·50% for underpaid tax and 3·50% for overpaid tax. Multiply by the unpaid amount and the number of months, divided by 12.
  8. 8Show every working clearly in Section C, and state the due date for each payment.

Quickest way: Three-line payable and on-account check

When to use it: Use this in Section A and Section B questions where you only need a payable figure or a payment on account.

  1. Write liability, then minus PAYE, then equals payable. Do it in one line so you cannot forget the deduction.
  2. For payments on account, write the last year's net figure, then ask two questions: is it under £1,000, and is at least 80% of the liability already deducted at source? If yes to either, the answer is nil.
  3. Otherwise halve the net figure. Use 8·50% on late tax and 3·50% on overpaid tax, and check which one the question asks for before multiplying.

Common mistakes in Tax Payable, Payments on Account and Interest

  • Forgetting to deduct PAYE and stopping at the liability.

    The computation feels finished once the tax is calculated.

    Fix: Always add a final line for tax deducted at source. Read the question for any PAYE or tax already paid.

  • Basing payments on account on the current year's liability.

    Students link the payments to the year they are paid in.

    Fix: Use the previous year's figures. The payments are an estimate of this year's bill based on last year's.

  • Leaving out tax deducted at source when calculating payments on account.

    They halve the total liability instead of the net amount.

    Fix: Deduct PAYE and other tax deducted at source from last year's liability first, then add Class 4 NIC, then halve.

  • Including capital gains tax or Class 2 NIC in payments on account.

    All the tax is paid on 31 January so it seems to belong together.

    Fix: Payments on account cover income tax and Class 4 NIC only. Capital gains tax is paid separately, as part of the balancing payment date.

  • Swapping the two interest rates.

    Both rates look similar in the tax table.

    Fix: Remember that 8·50% is the cost of owing HMRC and 3·50% is what HMRC pays when you have overpaid.

  • Counting interest from the wrong date.

    They start from the end of the tax year or the date of the return.

    Fix: Interest on underpaid tax runs from the due date of that payment, not the end of the tax year.

Worked examples

Example 1

For 2025–26, Dana has employment income of £45,000 (PAYE deducted £6,300) and bank interest received of £2,000. Calculate the income tax payable. Use a personal allowance of £12,570, a basic rate band of £37,700 and the savings nil rate band for a basic rate taxpayer.

Show the solution
  1. Total income = £45,000 + £2,000 = £47,000.
  2. Taxable income = £47,000 − £12,570 = £34,430. The non-savings taxable income is £45,000 − £12,570 = £32,430.
  3. The starting rate for savings does not apply because non-savings taxable income is above £5,000.
  4. Tax on non-savings income: £32,430 × 20% = £6,486.
  5. Savings income of £2,000 falls in the basic rate band (£32,430 + £2,000 is below £37,700). The first £1,000 is covered by the savings nil rate band and taxed at 0%.
  6. Tax on the remaining savings income: £1,000 × 20% = £200.
  7. Income tax liability = £6,486 + £200 = £6,686.
  8. Income tax payable = £6,686 − £6,300 PAYE = £386.

Answer: Income tax payable is £386.

Example 2

Sam is self-employed. For 2025–26 his income tax liability was £9,000, of which £3,000 was deducted at source, and his Class 4 NIC was £1,800. For 2026–27 his income tax liability is £10,500, of which £3,200 was deducted at source, and his Class 4 NIC is £2,000. (a) Calculate the payments on account for 2026–27 and say when they are due. (b) Calculate the balancing payment for 2026–27. (c) The balancing payment is paid three months late. Calculate the interest, using the rate on underpaid tax of 8·50%.

Show the solution
  1. Check the tests for 2026–27 payments on account. The 2025–26 net income tax is £9,000 − £3,000 = £6,000, which is not under £1,000. Tax deducted at source is £3,000 ÷ £9,000 = 33%, which is below 80%. Payments on account are required.
  2. Basis for payments: £9,000 − £3,000 + £1,800 = £7,800.
  3. Each payment on account = £7,800 × 50% = £3,900. They are due on 31 January 2027 and 31 July 2027.
  4. Actual 2026–27 net liability: £10,500 − £3,200 + £2,000 = £9,300.
  5. Payments on account made: £3,900 × 2 = £7,800.
  6. Balancing payment = £9,300 − £7,800 = £1,500, due on 31 January 2028.
  7. Interest = £1,500 × 8·50% × 3 ÷ 12 = £31.875, which is £32 to the nearest £.

Answer: (a) Two payments of £3,900, due 31 January 2027 and 31 July 2027. (b) Balancing payment £1,500, due 31 January 2028. (c) Interest £32.

Exam tips

  • In Section C, the last line of the computation should always be the deduction of PAYE. Examiners expect it.
  • Objective test questions are all or nothing, so write the net figure first, then apply the 50% for payments on account, before choosing an answer.
  • Look at which year the question gives. Payments on account use the earlier year's liability, and the balancing payment uses the current year's.
  • Each objective test question is worth 2 marks, so make sure you identify the correct date or rate. In Section C, state due dates where the question asks for them.
  • Round to the nearest £ as the exam instructions say, and show working for every figure in Section C.

Practice questions from The comprehensive computation of taxable income and income tax liability

Tax Payable, Payments on Account and Interest in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Tax Payable, Payments on Account and Interest: frequently asked questions

How do I calculate income tax payable in TX-UK?

Finish the income tax computation to get the total liability. Then deduct tax already paid at source, mainly PAYE. The result is the tax payable. If it is negative, the taxpayer is due a repayment.

How are payments on account calculated?

Take the previous year's income tax liability, deduct its tax deducted at source and add its Class 4 NIC. Halve the result. You pay one half on 31 January in the tax year and the other on 31 July after it. No payments are due if the net income tax is under £1,000 or at least 80% was deducted at source.

What interest rates apply to underpaid and overpaid tax?

The exam gives 8·50% on underpaid tax and 3·50% on overpaid tax. Interest runs from the due date to the date of payment. Multiply the unpaid amount by the rate and the months late, then divide by 12.

Is capital gains tax included in payments on account?

No. Payments on account only cover income tax and Class 4 NIC. Capital gains tax is not included, and Class 2 NIC is also left out.