With the tax return deadline of 31st January fast approaching, newcomers to Self-Assessment are being warned to budget for an extra tax payment.
The Low Incomes Tax Reform Group (LITRG) has said that many newcomers to Self-Assessment fail to realise they may have to pay some money in advance towards their next tax bill on that day, too.
‘Payments on account’ (POAs) are payments made towards your following year’s income tax (and Class 4 national insurance contributions bill, if you are self-employed).
If your tax bill for 2016/17 is more than £1,000, you may have to make POAs for 2017/18.
However, if more than 80% of your income is taxed at source, for example under PAYE or the Construction Industry Scheme (CIS), then you will not have to make such payments.
When calculating POA due for 2017/18, you take your tax bill for 2016/17 (not including Class 2 national insurance contributions, capital gains tax liabilities or student loan repayments) and divide this figure by two.
The resulting number is each POA for 2017/18 – one due on 31st January 2018 and the other due on 31st July 2018.
POAs will be taken off the tax due from your next tax return.
If you still have tax to pay for 2017/18 after you have made your POAs, you must make a ‘balancing payment’ by 31 January 2019.
If your POAs prove to be more than your eventual tax bill for 2017/18, HMRC will refund the difference to you.
LITRG Chair Anne Fairpo said:
Payments on account are intended to help you spread out your tax bill but are easily overlooked.
In particular, many newcomers to self-assessment fail to factor in these ‘payments on account’ when budgeting for their first tax bill and are shocked when they owe more money than expected.
If you think your tax bill will be less for 2017/18 than 2016/17 because (for example) you had less self-employed income, then it is possible to ask HMRC to reduce your payments on account.
‘You need a reasonable estimate of the amount you will owe in 2017/18 in order to reduce your payments on account. If you reduce them too much, you could face interest charges, and even a penalty if the claim was fraudulent or negligent.
You can reduce your payments on account by filling in a SA303 form or, if you file your tax return online, by logging into your HMRC online services account and clicking ‘Reduce my payments on account’ or via your personal tax account.
Anne Fairpo added:
You must tell HMRC if you want to reduce your payments on account. If you simply pay a lower amount to HMRC, this will show on their systems that you have not paid enough and it is likely that they will contact you and you could be liable to pay a fine.
The LITRG point out that if you cannot reduce your payments on account but will struggle to pay them as they are, i.e. in two lump sums, you can set up a budget payment plan and make regular payments in advance to spread them out a bit more.
Going further, if you cannot pay them, full stop, LITRG strongly recommends you contact HMRC as soon as possible, and certainly before the due date of payment, to discuss your case as they may be able to give you more time to pay.
Tax doesn’t have to be taxing, but for those unfamiliar with the the self-assessment system, it often can be.
This is one area where it pays to get professional advice from a Chartered Accountant and budget carefully to have enough money to pay your tax bills consistently and on time.
Newcomer to self-assessment? Budget for an extra tax payment. Share on X
