The 31 July payment on account: where Section 24 catches up with landlords

If you let property, a tax bill lands by midnight on 31 July. It is your second payment on account, it is not a new bill, and for a lot of landlords it has quietly grown over the past few years. The reason is Section 24.

Here is the uncomfortable bit: your July payment is half of last year's tax bill, and Section 24 is what made last year's bill bigger. So the 31 July payment is where the mortgage interest restriction actually shows up in your bank account. Confirm your own figure with HMRC before you do anything, but here is what is going on, and the one decision worth making before the end of the month.

The short version

• The amount due by midnight on 31 July is your second payment on account: an advance towards this year's tax, not a second bill for last year.
• Each payment on account is half of last year's total tax bill. The first half was due on 31 January, the second is due on 31 July.
• For most higher-rate landlords it is bigger than it used to be because Section 24 restricts mortgage interest to a 20 percent basic-rate tax reduction, which pushes the underlying bill up.
• Unlike the self-employed, a normal landlord's payment on account is Income Tax only. Ordinary rental profit does not attract Class 4 National Insurance.
• You can ask HMRC to reduce it if your income has genuinely dropped, but reduce it too far and they charge interest on the shortfall, currently 7.75 percent.

What the 31 July payment actually is

A payment on account is an advance towards your current year's tax bill, taken in two halves: one on 31 January, one on 31 July. Each half is usually half of the tax you owed last year.

So if last year's Self Assessment bill was 6,000 pounds, each payment on account is 3,000 pounds: one in January, one on 31 July. It is not a second bill for last year. It is you paying ahead on this year. January is the one that hurts, because it lands with the balance for the previous year on top. July is the one that ambushes you, because by summer it feels like the tax was already sorted. It was not. The mechanics, and how the two payments fit together, are in our guide to payments on account for landlords.

Why it is bigger for landlords now: Section 24

For most higher-rate landlords, the payment on account has grown because Section 24 increased the tax bill it is based on.

It used to be simple. You deducted mortgage interest from your rental income and paid tax on the profit that was left. Since 6 April 2020 you cannot. You now pay tax on your rental income before deducting finance costs, and instead receive a 20 percent basic-rate tax reduction for the interest. For a basic-rate landlord that is roughly the same. For a higher-rate (40 percent) or additional-rate (45 percent) landlord it is a real increase, and it can push some landlords into a higher band on paper even when their actual profit has not moved.

Now join the dots. Your payment on account is half of last year's bill. Section 24 made last year's bill bigger. So it baked a higher number into your payments on account, and it keeps doing it every year until something changes. If you want the full breakdown of how the restriction is calculated and what landlords are doing about it, that is the job of our Section 24 guide.

Do you even have to pay it?

You only make payments on account if last year's tax bill was 1,000 pounds or more and you paid less than 80 percent of your tax at source.

For most landlords living on rental profit with no large PAYE salary, both are true, so you are in. If you also have a salaried job where PAYE already covers most of your tax, you might fall under the 80 percent line and have smaller payments or none. Do not assume either way. Log in and check what HMRC is actually asking for, the same place you file your Self Assessment.

The bit landlords get wrong: National Insurance

A normal landlord's payment on account covers Income Tax, not National Insurance. Ordinary rental profit is not trading income, so it does not attract Class 4 National Insurance.

This trips people up because most guidance about payments on account is written for the self-employed, where the payment does include Class 4. For a standard buy-to-let landlord, that part simply does not apply. The only exception is if your activity is genuinely a trade rather than a property rental, for example serviced accommodation run as a business, where National Insurance can come into play. If that is you, take advice on it specifically.

The real decision: do you reduce it?

You can tell HMRC to reduce your payments on account, but only do it if your income has genuinely fallen, because reducing it too far means interest on the shortfall.

Your July payment is based on last year. If this year is honestly worse, you sold a property, a long void ate months of rent, or rising rates wiped out your margin, then a payment based on last year overstates what you will really owe. You can ask HMRC to lower it through your online account or with form SA303. But if you knock it down and your real bill comes in higher, HMRC charges interest on the difference, currently 7.75 percent a year. Wanting to hold onto the cash through a quiet month is not a good enough reason. A genuine drop in income is.

If you want to bring the bill down for real rather than just deferring it, do it the legitimate way: claim every allowable expense you are entitled to, and if Section 24 has made the numbers hurt, look properly at whether your structure still fits with our incorporation decision framework.

Common questions

When exactly is the second payment on account due?

By midnight on 31 July. It is the second of two advance payments towards your tax bill, the first being due on 31 January. Miss it and HMRC charges interest on the late amount.

Why is my payment on account higher than my profit feels?

Because it is based on last year's tax bill, not this month's bank balance, and for landlords Section 24 has pushed that bill up by restricting mortgage interest relief to a 20 percent basic-rate reduction. If your real income this year is genuinely lower, you can ask HMRC to reduce the payment.

Does a landlord's payment on account include National Insurance?

For a normal buy-to-let landlord, no. Rental profit is not trading income, so it does not attract Class 4 National Insurance, and your payment on account is Income Tax only. National Insurance can apply only where the letting is run as a genuine trade.

Can I reduce my second payment on account?

Yes, through your HMRC online account or by submitting form SA303, but only if you expect to owe less this year. If you reduce it below what you actually owe, HMRC charges interest on the shortfall, currently 7.75 percent a year.

The bottom line

The 31 July payment is not a punishment and it is not a new bill. It is half of last year's tax, brought forward, and for most landlords last year's tax is higher because of Section 24. Treat it as expected, set the money aside the way you would for any fixed cost, and never reduce it just to get through a slow month.

If you want to understand why your bill climbed in the first place, and what landlords are actually doing about it, read our guide to Section 24 and what it does to your tax bill. For how the payment itself works and how to reduce it properly, see payments on account explained.

This is general information about how landlord tax works in the UK, not tax advice. Check your own figures with HMRC and confirm current rates before acting.