Unfortunately, Payment on Account which was originally designed to help self-employed spread their tax bill, actually results in increased financial issues for those who already find it difficult to pay.
Here we have outlined some advice on how you can potentially reduce payments or what to do when you can’t afford your next payment on account.
What is Payment on Account?
Your payment on account is calculated by looking at your previous year’s income tax bill and is paid in two instalments. It is designed to help you pay off some of your tax bill in advance.
On 31 January each year you need to make one ‘balancing payment’ for the final payment of the last tax year (if you still have outstanding tax to pay) and one of the first two advance ‘payments on account’ for the current year.
The second payment on account is due 31 July. Each of these payments is half the amount due for the previous year and includes Class 4 National Insurance Contributions (NIC). Class 2 National Insurance, student loan repayments and capital gains are not included in payment on account. They are paid within your balancing payment.
If 2018-19 was your first year in business, then you won’t have any payments on account to make until 2020.
Payments on account are mandatory unless:
• Your previous tax return bill was less that £1,000; or
• You’ve already paid more than 80% of all the tax you owe for the year
How to reduce payments on account
If you have a reasonable estimate of the amount you owe and think your bill is likely to be lower than the previous year then it is possible to ask HMRC to reduce your payments on account. Perhaps you’re a freelancer who is going back into employment and won’t owe as much for the year.
You can reduce your payments by filing a SA303 form, or by logging into your online account. You can’t simply pay less when the amount is due, or you may find yourself subject to penalty fines.
If you overpay on your tax bill HMRC will send you a refund.
Can’t afford your next payment on account?
If you cannot afford your 31 July instalment, then we can help negotiate a time to pay agreement with HMRC. We would advise that you first check your tax bill is correct. If you believe it to be incorrect then you can appeal and take action to do so before you enter into a time to pay arrangement.
If you think you will be unable to afford your 31 July payment, then contact us to start negotiations with HMRC as soon as possible and before the tax becomes due. If you act quickly you can avoid any interest charged on late payments.
What is determination?
If you have not submitted your tax return, then you will receive a letter of ‘determination’ of the tax you are believed to owe. This will be an estimation from HMRC but is legally enforceable until you submit your outstanding return. You must submit your outstanding return within 12 months of receiving the letter of determination, or three years from the filing date (whichever is later).
What about an HMRC time to pay arrangement?
You can negotiate a time to pay arrangement of smaller instalments over up to a 12-month period. Any instalment arrangement is at HMRC’s discretion and negotiating with HMRC can be difficult. Our experienced team have strong connections with HMRC and with a strong success rate in avoiding tax penalties we can work on your behalf. Upon reaching a successful agreement you will have the time you need to manage your company’s finances and get through this stressful period.
Find out more here or contact one of our advisors for more information.