While the 31 January 2018 deadline for submitting your 2016/17 tax return and paying your tax bill is well known, the experience of the Low Incomes Tax Reform Group (LITRG) is 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 per cent 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 31 January 2018 and the other due on 31 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.”
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.
Notes for editors
1. You can find more information on payments on account on the LITRG website.
2. You can find the form SA303, and link to online services via GOV.UK.
3. You can find more information on budget payment plans and what to do if you can’t pay your tax bill on GOV.UK: https://www.gov.uk/pay-self-assessment-tax-bill/budget-payment-plan
4. Low Incomes Tax Reform Group
The LITRG is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes. The CIOT is the leading professional body in the United Kingdom concerned solely with taxation.
The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. The CIOT’s 18,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Contact: Hamant Verma, External Relations Officer, 0207 340 2702 HVerma@ciot.org.uk (Out of hours contact: George Crozier, 07740 477 374)More Articles by Chartered Institute of Taxation (CIOT) ...