It’s that time of the year again when the tax return deadline for 2019/20 will soon be upon us. As well as filing and paying for 2019/20, it’s also the due date for your 2020/21 first payment on account. Have you considered whether you can reduce your payments on account?
What are payments on account?
Do you pay tax under self-assessment? If you do, you may need to make payments on account. These payments are made in advance towards your taxes and Class 4 National Insurance bills.
If your last self-assessment bill was at least £1,000, you’ll need to make a payment on account. The only exception to this is if you’ve already paid at least 80% of what you owe under deduction at source such as via PAYE.
These payments are due on 31 January of each tax year, and 31 July after the tax year. As an example for 2020/2021, the payment on account is due 31 January 2021 and the subsequent payment on account is due 31 July 2021.
How are payments on account calculated?
Payments on account are a great way of helping you to get your tax bill in order.
HMRC assumes that the current year’s liability will be similar to the previous tax year’s liability. Each payment on account is 50% of the previous year’s tax and Class 4 National Insurance liability.
Remember – Class 2 National Insurance Contributions are not considered in the workings.
How does Coronavirus impact payments on account?
For 2020/21, payments on account are based on profits from 2019/2020. If your business has been adversely affected by the Coronavirus pandemic, the payments will be based on pre-pandemic profits rather than reducing the amount.
Cashflow may be tight right now, so HMRC may allow you to reduce your payment on account. It doesn’t make much sense to be making higher payments than required when you are trying to keep your business afloat.
You can reduce your payments on account so that they better reflect your likely taxable profits for 2020/21.
Make sure you take into account any SEISS grant or other taxable support payments when working out your taxable profits. You do pay taxes on these!
How do I reduce my payments on account?
You should not pay a reduced amount without letting HMRC know that you are electing to reduce your payment.
You can contact them via the Government Gateway and selecting ‘reduce payments on account’ or completing a SA303 and sending to them directly.
Within your Self-Assessment form there is a section called ‘other information’. In this section you can specify the amount you want to pay and the reason for reducing your payment.
Make the appropriate assessment!
Although cashflow may be tight, be sure to make a fair assessment on what your taxable profits will likely be.
If you reduce your payments it may give you some breathing space in January and July, but you’ll be charged on the shortfall between what the initial payment should have been and the payment that you have made.
If you do not owe more than £30,000 you can make an application with HMRC for a ‘Time to Pay’ agreement that allows you to pay your tax in instalments. This may be a better alternative than reducing your payment on account.
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