Should I Reduce My Payments on Account?
When you may intend to minimize your self-assessment payments on account, and the repercussions of getting it wrong.
Under self-assessment, payments on 31 January in the tax year, and on 31 July after the end of the tax year. To the extent that any type of additional tax schedules, the balance should be paid by 31 January after the end of the tax year
When are payments on account required?
Taxpayers are called for to make payments on account in the direction of the current year’s tax liability unless the tax due for the previous year was less than ₤ 1,000, or at least 80% of it was collected at resource (for example, under PAYE). Each payment on account is fifty percent of the tax and Class 4 National Insurance contributions liability for the previous tax year.
Example 1: Making payments on account
John in a self-employed painter and designer. In 2023/2024, his total tax and Class 4 National Insurance contributions bill was ₤ 3,400. None was accumulated at resource.
As the tax and Class 4 National Insurance for 2023/2024 was greater than ₤ 1,000, John is needed to make payments on account of his 2024/25 liability. Each payment is 50% of the previous year’s liability.
Consequently, John is called for to pay on account of ₤ 1,700 each (i.e. 50% of ₤ 3,400) on 1 January 2025 and on 31 July 2025. Any type of equalizing payment is due by 31 January 2016.
Can I decrease my payments on account?
Tax obligations change from year to year, and the tax payable for the current year may be essentially than that payable in the previous year. There are a number of reasons that an individual’s tax bill might be less than in the previous year. For instance, the individual might stop self-employment component method with the year, there might be a recession in business or a person may receive lower dividends or untaxed interest than in the previous year. Where this is the case and payments on account are made by referral to the previous year’s liability, tax will certainly be paid too much.
While any kind of overpaid tax will eventually be settled (plus interest at 0.50%), most people would like not to overpay to begin with. HMRC identify this and the center exists for a taxpayer to minimize his or her payments on account where existing year income is most likely to be less than in the previous tax year.
A taxpayer can make a case to lower his/her payments on account in various methods. A claim can be made on the calculation pages of the self-assessment tax return or can be made on the internet through HMRC’s Self-Assessment Online Service. HMRC also produce a designated kind for this purpose– type SA303– which is offered to download and install from the HMRC internet site (see www.hmrc.gov.uk/sa/forms/sa303.pdf).
Example 2: Reducing payments on account
John damages his leg and is incapable to work for three months. As a result his income drops and he expects his income tax and Class 4 NIC liability to be around ₤ 2,000.
He lowers each payment on account to ₤ 1,000, making the claim online. Consequently he makes payments on account of ₤ 1,000 instead of ₤ 1,700 on 31 January 2025 and on 31 July 2025
If you understand your tax liability will certainly be less than in the previous tax year, make a case to lower your payments on account instead of overpaying and claiming a subsequent reimbursement. The rate of interest on paid too much tax is reduced.
Getting it wrong
Approximating your tax liability in advance is not a precise science, and it is very easy to get it incorrect. If you expect your income to fall and you reduce your payments on account on this basis, however it ends up that the tax liability is higher than you believed, you will be charged interest to the extent that the payments on account were less than they must have been. HMRC might also bill a penalty if you did not take affordable care.
Inform HMRC as soon as possible if you become aware that you have decreased your payments on account by way too much and pay the deficiency to lower the interest payable.
Be cautious of the temptation to decrease your payments on account by way too much to delay the payment of tax– you will certainly be charged interest if your payments on account are too low, and as shown over you may additionally be charged a fine.
Practical Tip:
Review your tax placement and readjust your payments on account to make sure that they precisely reflect your best quote of the existing year’s liability.
