31 July 2011 Payments on Account for Self Assessment

317I'm no mathematician, but if today is the 18th of July that means there are only 13 days until 31 July. You may not think this is news, and if you are one of the lucky people who doesn't have to complete a tax return form, 31 July will probably pass you by in a heady rush towards August.

However, if you do complete a Self Assessent Tax Return, you might need to start looking down the back of the sofa in order to collect enough pennies to pay your 31 July tax bill in the form of your second Payment on Account for 2010/11.

Er, don't tax bills come at the end of January? You know, when everyone is still broke from Christmas?

Well, yes. But under Self Assessment the taxman prefers it if you pay 'on account' that is, as you go along. The first year you have a tax bill in January you need to look at the amount owed, and what it comprises, and decide whether you fall into the Payment on Account regime. If you do, you will not only need to pay your tax bill in January, but you will need to pay the same amount again in two equal instalments, due on 31 January and 31 July. That's right, if  you  fall foul of Payments on Account, you will actually need to pay 150% of your tax liability on 31 January and 50% on the following 31 July. Ouch.

The rationale behind it is that, if all things remain equal, by the following January you will have no tax bill as you will have already paid it all during the previous 12 months.  For example, Payments on Account due now will go towards your 2010/11 liability, so if your 2009/10 liability (due 31 January 2011) was £4,000, your Payments on Account will be two payments of £2,000. This means your total bill would have been £6,000 on 31 January 2011 and £2,000 on 31 July 2011. You have therefore paid a total of £8,000 for the two tax years 2009/10 and 2010/11.

Going forwards then, you just continue to pay 50% in January and 50% in July.  From our example above, in January 2012, you have already paid your £4,000 tax bill for the 2010/11 year, so will just have to pay the £2,000 first Payment on Account for 2011/12, and the same in July. Simples.

So should I be paying Payments on Account then?

Even if you didn't realise you should have been paying Payments on Account, you can bet your bottom dollar HMRC would have pointed this out to you when you submitted your Tax Return by October/ January. In very simple terms, if your income tax liability is under £1,000 (capital gains tax is not counted) or 80% of your tax is collected via PAYE on your employment, you should be OK. Everyone else better get their chequebook out.

What happens if I don't have the cash?

Whenever you don't pay the taxman, you face interest and penalties on the amount paid late. The current rate of interest is 3%pa on amounts paid late, but that is nothing compared with 5% surcharges charged when tax is 30 days, 6 months and 12 months late. Yes, 5% on each occasion.

However, the good news is that the penalty surcharge amounts do not apply to Payments on Account, so you will only be looking at a 3% pa. Which is a darned site cheaper than getting a loan.

Do remember though, that once you get to 31 January 2012, any unpaid Payment on Accounts due in 2011 become a balancing payment for the 2010/11 tax year. And that IS subject to penalty surcharges. If you are really struggling, contact your tax office and ask for a payment arrangement, where you can spread your payments over time. Note that "HMRC will consider any payment arrangement you suggest" but they don't have to accept it.

But my tax bill will be lower this year. My business has made no profit (for example)

If you have a genuine reason for thinking your overall tax bill for the 2010/11 tax year will be lower than for 2009/10 (upon which the Payments on Account are based) you can claim to reduce them, either when you submit your tax return for 2009/10 or as a standalone claim on form SA303 . While this will stop them asking for money, you should only reduce Payments on Account with care as, if it subsequently transpires that your tax liability is such that the Payment on Account was due, you will be charged interest backdated to the date the Payment on Account was due.

As ever, if you are concerned over your tax bill, or have other worries about your tax affairs, speak to an accountant or tax adviser.

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