Payments on Account and US Estimated Tax

An American paying UK tax through Self Assessment can owe HMRC payments on account on 31 January and 31 July and IRS estimated tax four times a year. Neither system counts the other's prepayments, so plan the cash around how the US foreign tax credit picks up UK tax.

Most Americans in the UK only discover this after their first full Self Assessment bill. The January payment turns out to include not just last year's tax but half of next year's as well, and in the same month the IRS expects a fourth-quarter estimate. Get the sequencing right and the US instalments can often be kept small or avoided. Get it wrong and you prepay both governments on the same income, then wait months for the credit to catch up. This guide sets out both regimes side by side and the decisions that tie them together.

Key takeaways

• UK payments on account are two advance instalments, each normally half of last year's Self Assessment bill, due on 31 January and 31 July, with any balance settled the following 31 January.
• HMRC does not ask for them if last year's Self Assessment tax was less than £1,000, or if more than 80% of your tax was collected at source, for example through PAYE.
• The IRS expects estimated tax from individuals who expect to owe $1,000 or more when they file, paid across four payment periods using Form 1040-ES.
• US safe harbours are based on your prior-year US tax, which for many Americans in the UK is low or nil after the foreign tax credit. That is often the key to avoiding US estimates altogether.
• UK tax only reduces US tax through Form 1116, and when it counts depends on whether you claim the credit on a paid or an accrued basis. That choice drives the whole cash plan.

What are HMRC payments on account?

According to GOV.UK's guidance on payments on account, payments on account are advance payments towards your next Self Assessment bill, including Class 4 National Insurance if you are self-employed. Each one is usually half of the tax you owed for the previous year. They are due by midnight on 31 January and 31 July.

You do not have to make them if either the tax you owed through Self Assessment last year was less than £1,000, or you paid more than 80% of the tax you owed outside Self Assessment, for example through your tax code. If the payments on account turn out to be less than the final bill, you make a balancing payment by the following 31 January. If they were too high, you can claim a refund.

The trap is the first year. If you did not make payments on account last year, the 31 January bill includes the whole of last year's tax plus the first payment on account for the current year, so it can be roughly one and a half times the tax for the year being filed. For a newly self-employed American, or one who has started receiving rental income or US dividends that are not taxed through PAYE, that January can be a shock.

If you expect this year's tax to be lower, you can ask HMRC to reduce your payments on account, online or on form SA303. If you reduce them too far and the bill is higher, HMRC charges interest on the difference.

When does the IRS expect estimated tax?

The IRS guidance on estimated taxes says individuals generally have to make estimated payments if they expect to owe tax of $1,000 or more when their return is filed. The year is divided into four payment periods, each with its own due date, and the payments are made with Form 1040-ES or online. If a due date falls on a weekend or legal holiday, the next business day counts.

You can usually avoid an underpayment penalty by paying, through withholding and estimates combined, the smaller of most of this year's tax or the whole of last year's tax. The IRS estimated tax FAQs explain that if your prior-year adjusted gross income was above $150,000 ($75,000 if married filing separately), the prior-year safe harbour rises to 110% of last year's tax. Penalties are worked out on Form 2210, which also offers an annualised method for people whose income arrives unevenly through the year.

How do the two calendars line up?

| Month | UK (HMRC, Self Assessment) | US (IRS, Form 1040-ES) |

|---|---|---|

| January | Balancing payment for the last tax year and first payment on account for the current one, both on 31 January | Final estimated tax instalment for the previous US year |

| April | UK tax year ends 5 April; new year starts 6 April | First estimated tax instalment, due 15 April, alongside the annual return deadline |

| June | No payment | Second estimated tax instalment, due 15 June |

| July | Second payment on account, due 31 July | No payment |

| September | No payment | Third estimated tax instalment |

The mismatch is structural. The UK tax year runs from 6 April to 5 April, so a single UK year straddles two US calendar years, and the UK prepays on its own timetable. The IRS, meanwhile, measures your instalments against the US year.

Why do the two sets of prepayments collide?

The US taxes citizens on worldwide income, so the UK income behind your payments on account is also on your US return. What stops you paying twice is the foreign tax credit, claimed on Form 1116. The question is when the UK tax becomes creditable.

• On the paid basis, which is the default for most individuals, UK tax is credited in the US year you actually pay it. Because payments on account and balancing payments land in January and July, the credit often arrives in a different US year from the income it relates to.
• On the accrued basis, you claim the UK tax in the year it accrues, which matches it more closely to the income. The election to accrue is made on Form 1116 and, once made, applies to all later years, so it should be a deliberate decision rather than a default.

Either way, a mismatch in one year is not usually lost. Unused credits can be carried back or forward, which our guide to the foreign tax credit carryover explains. But a carryover is a refund deferred, and in the meantime cash has gone to both governments.

Do Americans in the UK need to pay US estimated tax at all?

Often not, and the reason is the safe harbour. If the UK taxes your income at a rate at least as high as the US would, the foreign tax credit may reduce your US tax to nil or close to it. If last year's US tax after credits was nil, your prior-year safe harbour requirement is effectively nil as well. The IRS also explains, in the Form 2210 instructions, that you do not owe an underpayment penalty if you had no tax liability for a full prior year in which you were a US citizen or resident.

Estimates become necessary when US tax remains after the credit. Common reasons:

• Income the UK taxes lightly or not at all, such as interest or gains inside an ISA, which the US taxes in full.
• Income in a separate Form 1116 category from the UK tax you paid, so the credit cannot reach it.
• US self-employment tax, which the foreign tax credit does not reduce, unless a certificate of coverage under the US-UK totalisation agreement applies.
• Net investment income tax, which the US generally does not let the foreign tax credit offset.
• A large one-off event, such as selling US shares or a US property, where the US tax is due before any UK credit is available.

How should you plan the cash in practice?

Start from last year's numbers on both sides, then work forward.

1. Work out whether HMRC will ask for payments on account. If more than 80% of your UK tax is collected through PAYE, there may be none. If you have new untaxed income, expect them and budget for the first-year double January.

2. Decide the foreign tax credit basis with your preparer. Accrual usually smooths the match between UK tax and US income, but the election binds future years, so model both before choosing.

3. Check whether you are inside a US safe harbour. If last year's US tax after credits was nil or small, the estimates needed to stay safe may also be nil or small.

4. Size any US estimates to the tax the credit will not cover, not to your total income. ISA income, investment income tax and self-employment tax are the usual culprits.

5. Reduce UK payments on account when income falls, using SA303, rather than overpaying and waiting for a refund. If a UK bill is unaffordable, HMRC Time to Pay arrangements can spread it.

6. Keep the evidence. The date and amount of every UK payment, in sterling, is what your US preparer needs to compute the credit and convert it to dollars.

The interaction between UK Self Assessment boxes and the US return is set out in our guide to the SA100 boxes US citizens get wrong.

How does Next Tax Source plan prepayments for dual filers?

We prepare the UK Self Assessment and the US return together, so the payments on account, the foreign tax credit basis and any US estimates are decided as one plan rather than by two advisers who never compare notes. Our US-UK tax specialists build a twelve-month payment schedule for each client showing what is due to HMRC and the IRS, and when. Every return is reviewed by our IRS Enrolled Agent, who is also ACCA-qualified, and you approve and sign both returns yourself. If your first full Self Assessment bill is approaching, book a consultation before the next 31 January.