Are UK payments on account creditable on Form 1116?

Yes, to the extent they are payments of UK income tax that you legally owe. A paid-basis filer claims each payment on account in the US calendar year in which it is paid, translated at the exchange rate on the payment date. Any part later refunded by HMRC is not creditable and must be dealt with as a foreign tax redetermination. National Insurance and HMRC interest collected alongside are not creditable income tax.

Which US tax year does the 31 January payment on account fall into?

On the paid basis it falls into the US calendar year in which 31 January sits, so a payment made on 31 January 2026 goes on the 2026 US return. On the accrued basis it forms part of the UK liability for the year ending 5 April 2026, which accrues on that date and is also claimed on the 2026 US return. The balancing payment made the same day is treated differently under each method.

Can I switch from the paid basis to the accrued basis for the foreign tax credit?

A cash-method individual can elect to claim the credit on the accrued basis by checking the accrued box in Part II of Form 1116. IRS Publication 514 states that the election must be made on a timely filed original return, cannot be made on an amended return, and must be followed in all later years. In the election year, taxes paid for earlier years and taxes accruing that year may both be claimed.

When do I not have to make payments on account to HMRC?

HMRC guidance says payments on account are not required if your Self Assessment tax bill for the previous year was less than £1,000, or if more than 80% of the previous year's tax was collected outside Self Assessment, for example through your PAYE tax code. Employees with most income taxed at source often meet the second condition. Partners, landlords and investors with large untaxed income usually do not.

What happens if I reduce my payments on account too far?

HMRC charges interest on the difference between what you paid and what should have been paid, running from the original due dates. A penalty can apply if the reduction claim contained a fraudulently or negligently incorrect statement. For a paid-basis US filer, the reduced payments also mean less foreign tax paid in that US year, with the shortfall credited a year later when the balancing payment is made.

Do I have to tell the IRS if HMRC refunds an overpaid payment on account?

Yes, if you have already claimed a foreign tax credit for the amount refunded. IRS Publication 514 treats a refund of foreign tax as a foreign tax redetermination. If your US tax changes, you file Form 1040-X with a revised Form 1116 and a statement, and attach Schedule C (Form 1116) to your current-year return. Failing to notify the IRS without reasonable cause can lead to a penalty.

US UK Tax Returns Preparation: UK Payments on Account

In US UK tax returns preparation, HMRC payments on account decide which US calendar year receives the foreign tax credit for your UK income tax, and they rarely line up with the year in which the income was earned. A payment on account is an advance instalment of the current UK tax year's income tax, due on 31 January and 31 July, each normally equal to half of the previous year's Self Assessment liability. On the US side, a filer who claims the credit on the paid basis counts each instalment in the US year in which the money left the account, while a filer who has elected the accrued basis counts the whole UK liability in the US year in which the UK tax year ends.

That difference explains most of the Form 1116 problems we see on returns for US citizens and green card holders living in Britain: credits that arrive a year late, credits stranded in the wrong year, and exchange rates applied to the wrong dates. This guide stays with payments on account, maps every payment date to a US year under both methods, and works through a dated timeline.

What are HMRC payments on account and when are they due?

Payments on account are advance payments towards the Self Assessment bill for the tax year in progress. HMRC's guidance at https://www.gov.uk/understand-self-assessment-bill/payments-on-account describes two instalments, each usually half of the previous year's tax bill, due by midnight on 31 January and 31 July. The statutory basis is section 59A of the Taxes Management Act 1970, published at https://www.legislation.gov.uk/ukpga/1970/9/section/59A, which sets each payment at 50 per cent of the relevant amount, meaning the prior year's income tax assessed less tax already deducted at source.

When the return for the year is filed, the two instalments are deducted from the actual liability. Anything still owing is the balancing payment, due by midnight on 31 January following the end of the tax year. HMRC states that payments on account do not include capital gains tax, which is collected through the balancing payment. For a high-net-worth filer who realises a large gain early in the UK tax year, that tax can fall due almost twenty-two months after the disposal.

When are payments on account not required?

HMRC's guidance gives two conditions, either of which removes the requirement:

The tax you owed for the previous year through Self Assessment was less than £1,000.
More than 80% of the previous year's tax was collected outside Self Assessment, for example through a PAYE tax code or by deduction at source.

The second condition splits our client base. A senior employee whose salary and bonus run through PAYE often sits above the 80% line and never sees a payment on account. A partner in a professional firm, a fund principal taking profit share, a landlord or an investor with substantial dividends and interest will almost always be inside the regime, and one year of unusually large untaxed income can pull a PAYE employee in for the following year.

How do payments on account feed the foreign tax credit on Form 1116?

The foreign tax credit is claimed on Form 1116, and Part II of the form asks whether the foreign taxes are reported as paid or accrued. IRS Publication 514, at https://www.irs.gov/publications/p514, states the rule plainly: a taxpayer using the cash method claims the credit in the year the foreign tax is paid, and a taxpayer using an accrual method claims it in the year the tax accrues. Most individuals are cash-method taxpayers, so paid is the default.

Publication 514 then gives cash-method individuals a choice. They may elect to claim the credit for foreign taxes in the year the taxes accrue, by checking the accrued box in Part II of Form 1116. Three conditions attach to that election, and each one is easy to overlook:

The election must be made on a timely filed original return. Publication 514 says it cannot be made on an amended return.
Once made, the election must be followed in all later years. There is no going back to the paid basis when it happens to suit a particular year.
All foreign taxes go on the same basis. You cannot take some foreign taxes as paid and others as accrued.
In the year of the election, a filer who previously used the paid basis may claim both the foreign taxes paid in that year that relate to earlier years and the foreign taxes that accrue in that year.

On timing, Publication 514 explains that foreign taxes generally accrue when all the events have taken place that fix the amount of the tax and the liability to pay it, which is generally the last day of the foreign tax year. For UK income tax that day is 5 April. A US calendar-year filer on the accrued basis therefore claims the UK tax for the year ended 5 April 2026 on the 2026 US return, whatever dates the instalments were actually paid on.

Which UK payments fall in which US year under each method?

Take the UK tax year 6 April 2025 to 5 April 2026 and follow its three Self Assessment payments. The first payment on account is due on 31 January 2026, the second on 31 July 2026, and the balancing payment on 31 January 2027. The income behind that tax was earned across nine months of US 2025 and three months of US 2026.

On the paid basis, the two payments on account are credited on the 2026 US return and the balancing payment on the 2027 US return. None of the UK tax for that year is credited in 2025, the US year that contains three quarters of the income, unless tax was also withheld under PAYE during 2025. On the accrued basis, the entire liability for the year is credited on the 2026 US return, because the UK tax year ends on 5 April 2026.

Why does a paid-basis credit mix two UK tax years?

Because 31 January belongs to two UK years, every US calendar year on the paid basis contains three Self Assessment payments drawn from two different UK liabilities. The 2026 US return of a paid-basis filer carries the balancing payment for UK 2024 to 2025, paid on 31 January 2026, together with both payments on account for UK 2025 to 2026, paid on 31 January and 31 July 2026.

The amounts in that mix are driven by history, not by the current year's income. Both payments on account are fixed by the prior UK year's liability, and the balancing payment is the catch-up for a year that ended nine months before the US year began. When income rises sharply, through a liquidity event, a carried interest realisation or a large receipt outside PAYE, the UK tax on the spike arrives in the balancing payment and is credited in a later US year than the one that taxed the income.

The US rules offer a limited repair. Publication 514 provides that unused foreign taxes are ordinarily carried back to the preceding tax year first and then carried forward for up to ten years. A one-year carryback rescues a credit that arrives one US year late. It does not rescue one that arrives two years late, and that is exactly what can happen to UK capital gains tax: a gain realised in May 2025 is taxed on the 2025 US return, while the UK tax is not due until 31 January 2027.

A dated worked timeline: one filer, both methods

The following is an illustration only. The figures are invented to show the mechanics, they assume the whole liability is income tax with no PAYE, no capital gains and no National Insurance, and the exchange rates are assumptions chosen for the arithmetic rather than actual rates. Our illustrative filer is a US citizen resident in London whose Self Assessment income tax liability was £180,000 for 2023 to 2024, £200,000 for 2024 to 2025 and £260,000 for 2025 to 2026.

31 January 2025: first payment on account for 2024 to 2025, £90,000 (half of £180,000). Paid basis: US 2025. Accrued basis: US 2025, as the UK year ends on 5 April 2025.
31 July 2025: second payment on account for 2024 to 2025, £90,000. Paid basis: US 2025. Accrued basis: US 2025.
31 January 2026: balancing payment for 2024 to 2025, £20,000 (£200,000 less £180,000). Paid basis: US 2026. Accrued basis: still US 2025.
31 January 2026: first payment on account for 2025 to 2026, £100,000 (half of £200,000). Paid basis: US 2026. Accrued basis: US 2026.
31 July 2026: second payment on account for 2025 to 2026, £100,000. Paid basis: US 2026. Accrued basis: US 2026.
31 January 2027: balancing payment for 2025 to 2026, £60,000 (£260,000 less £200,000). Paid basis: US 2027. Accrued basis: US 2026.
31 January 2027: first payment on account for 2026 to 2027, £130,000 (half of £260,000). Paid basis: US 2027. Accrued basis: US 2027.
31 July 2027: second payment on account for 2026 to 2027, £130,000. Paid basis: US 2027. Accrued basis: US 2027.

Add up the 2026 US return. On the paid basis the creditable UK tax is £20,000 plus £100,000 plus £100,000, a total of £220,000, of which £20,000 relates to the earlier UK year. On the accrued basis it is the full 2025 to 2026 liability of £260,000. The £40,000 difference is not lost on the paid basis. It surfaces on the 2027 return, where the paid-basis total is £60,000 plus £130,000 plus £130,000, or £320,000.

Now the currency. Assume, purely for illustration, a rate of 1.30 dollars to the pound on 31 January 2026, 1.34 on 31 July 2026 and an average of 1.32 for calendar 2026. The paid-basis filer translates £120,000 at 1.30, giving $156,000, and £100,000 at 1.34, giving $134,000, a total of $290,000. The accrued-basis filer translates £260,000 at the assumed average of 1.32, giving $343,200. The two methods differ in sterling amount, in the UK year the tax belongs to and in the rate applied, and all three differences flow into the limitation calculation on Form 1116.

Which exchange rate applies to UK tax paid and UK tax accrued?

The Instructions for Form 1116, at https://www.irs.gov/instructions/i1116, set out two regimes. Foreign taxes claimed as paid are converted at the exchange rate on the day they were paid, or on the day of withholding for tax deducted at source. Publication 514 adds that foreign estimated tax payments are translated at the rate on the date of each payment, which is the rule that governs each payment on account for a paid-basis filer.

Foreign taxes claimed as accrued are generally converted at the average exchange rate for the tax year to which the taxes relate. The IRS publishes annual averages at https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates, while making clear that it has no official rate and accepts any posted rate that is used consistently. The average-rate rule has exceptions that bite on UK facts:

Taxes paid before the beginning of the tax year to which they relate are converted at the rate on the date of payment. PAYE withheld between April and December for a UK year that accrues in the following US year falls into this category.
An accrued-basis filer may elect to use the payment-date rate for accrued taxes denominated in a nonfunctional currency. The election is made by attaching a statement to a timely filed return for the first year it applies and then continues unless the IRS consents to revocation.

The failure mode we see most often is a single average rate applied to every figure on a paid-basis return. That is wrong for payments on account, because large sterling payments made on specific days in January and July can sit some distance from the annual average. We translate each payment at the rate for the date on the HMRC statement.

What happens if you reduce payments on account with form SA303?

If you expect the current year's liability to be lower than last year's, you can claim to reduce your payments on account. HMRC's page at https://www.gov.uk/government/publications/self-assessment-claim-to-reduce-payments-on-account-sa303 lists the grounds: business profits or other income have fallen, the tax relief you are entitled to has increased, or tax deducted at source is higher than in the previous year. The claim can be made through the online account or by posting form SA303, and HMRC states that it must be made by 31 January after the end of the tax year.

The cost of getting it wrong is interest. HMRC's guidance says you will be charged interest on the difference if the reduced payments turn out to be too low, and section 59A treats the correct instalments as having been due on the original dates. The same section imposes a penalty where a taxpayer fraudulently or negligently makes an incorrect statement in a reduction claim, capped at the difference between what would have been payable on a correct statement and what was actually paid. HMRC interest is a charge for late payment and is not an income tax, so it does not belong among the foreign taxes on Form 1116.

The knock-on effect on the US return depends entirely on the method. A paid-basis filer who reduces payments on account has reduced the foreign tax paid in that US year. If the reduction proves too deep, the shortfall is collected through the balancing payment the following 31 January and is credited one US year later. An accrued-basis filer sees no change in the credit at all, since the credit follows the final UK liability for the year rather than the dates on which cash moved.

Does a UK tax refund have to be reported to the IRS?

Yes. Payments on account are estimates, and when the actual UK liability comes in below the instalments already paid, HMRC repays the excess or sets it against a later bill. The Form 1116 instructions state that you cannot take a credit for amounts you do not legally owe, including amounts that can be refunded by the foreign country. A paid-basis filer who has already claimed both payments on account in full has therefore claimed more than the final liability supports.

Publication 514 calls this a foreign tax redetermination. It covers a refund of foreign tax, accrued tax that is eventually paid in a different amount, and accrued tax not paid within 24 months after the close of the tax year to which it relates. Where the redetermination changes the US tax, the filer must file Form 1040-X with a revised Form 1116 and an explanatory statement, and must also attach Schedule C (Form 1116) to the current-year return for each separate category of income. Where the US tax does not change, for example because a carryover absorbs the difference, Schedule C (Form 1116) is attached to the original return for the year in which the redetermination occurs.

Publication 514 states that where less foreign tax was paid than was claimed, the IRS must generally be notified by the due date, with extensions, of the original return for the year in which the redetermination occurred. Failure to notify without reasonable cause can attract a penalty of 5% of the tax due for each month or part of a month that the failure continues, up to 25%. A refund is translated at the exchange rate that applied when the tax was originally paid.

What happens in the first year of Self Assessment?

The first year is where payments on account cause the most damage. HMRC's guidance is explicit that a taxpayer who made no payments on account for the year pays the full tax bill plus the first payment on account for the following year on the same 31 January. One and a half years of tax falls due on a single day, with a further half year six months later.

Consider a US citizen who begins receiving untaxed UK partnership profits on 6 April 2025, with no tax deducted at source. Nothing is payable to HMRC during 2025 or 2026. On 31 January 2027 the whole 2025 to 2026 liability and the first payment on account for 2026 to 2027 are due together, followed by the second payment on account on 31 July 2027.

On the paid basis the US picture is stark. The 2025 US return taxes nine months of profits with no UK tax paid to credit, and the 2026 US return taxes a full year in the same position. The 2027 US return then receives roughly two years of UK tax at once. The one-year carryback takes the excess from 2027 back to 2026, but it cannot reach 2025, and US tax for both earlier years has to be funded in the meantime.

There are two ways to prevent this, and both must be decided early. The first is a voluntary payment to HMRC inside the US calendar year, which must be a genuine estimate of the liability, since any amount later refunded is not creditable. The second is the accrual election. On the accrued basis the 2025 to 2026 liability is credited on the 2026 US return, because the UK year ends on 5 April 2026, and any excess can be carried back one year to 2025. The election is permanent and cannot be made on an amended return, so it belongs in the preparation of the first affected US return.

How do US estimated tax and UK payments on account compete for cash in January?

January holds two deadlines sixteen days apart. The IRS explains at https://www.irs.gov/faqs/estimated-tax/individuals that the fourth estimated tax instalment, covering 1 September to 31 December, is due on 15 January of the following year. The UK balancing payment and first payment on account follow on 31 January.

The IRS states that individuals generally must pay estimated tax if they expect to owe at least $1,000 after withholding and refundable credits, and that the required amount is the smaller of 90% of the current year's tax or 100% of the prior year's tax, rising to 110% of the prior year's tax where prior-year adjusted gross income exceeded $150,000, or $75,000 if married filing separately.

The interaction is circular. The foreign tax credit reduces the US tax on which estimates are based, but on the paid basis the credit depends on UK payments not yet made. A 31 January payment to HMRC comes sixteen days too late to count in the US year just ended. A filer who assumes UK tax will cover the US liability and pays no estimates can find the credit sitting in the following year and an underpayment penalty accruing on the year just closed. We project both returns in the autumn and set the January estimate from that projection.

What should US UK tax returns preparation check before each payment date?

These are the checks we run on every file where the client is inside the regime:

Confirm from the HMRC statement whether payments on account apply this year, and why, by testing the £1,000 and 80% conditions against the prior year's figures.
Identify the Form 1116 method already in use. If the accrued box has ever been checked on an original return, the filer is on the accrued basis for good.
Schedule every expected HMRC payment by date and assign it to a US year under the method in use.
Strip out anything that is not creditable income tax. Publication 514 states that no credit is allowed for social security taxes paid to a country with which the United States has a social security agreement, which is relevant to the Class 4 National Insurance collected within payments on account. Interest and penalties are likewise excluded.
Before any claim to reduce payments on account, model the effect on the US credit and the US estimated tax position for the same year.
When the UK return is finalised, compare the actual liability with the tax already claimed on Form 1116 and deal with any redetermination within the notification deadline.

The UK return, the US return and the cash calendar are usually handled at different times of year, and payments on account sit in the gap between them. Preparing both returns from one schedule of dated payments keeps the credit where the income is.