If you have Payments on Account falling due in January 2021 then you may be considering reducing them.
Before you do that you need to read our post about the ability to pay tax over 11 months. Because of the interaction of penalties and the overall uncertainty about earnings, you might want to think about a different strategy.
Firstly, let’s run through some basics.
Payments on Account
If your tax bill is over £1,000 HMRC expect you to pay a further 50% in advance for the current tax year in January and then the same again in July.
An exception from Payments on Account occurs when more than 80% of the tax for last year has been paid via PAYE.
For 2019/20 assessments, you will have the balancing payment due in January 2021 plus a further 50% of the total tax liability in advance; to account.
After submitting the 2020/21 Tax Return, your Payments on Account will be revised to the actual. They can only be revised down, and they cannot exceed the original amount of tax calculated. Any excess for 2020/21 is due in January 2022.
Therefore, this means there is no risk – and lots of advantages – in filing your Return early.
Reducing the PoA
You can request for the Payments on Account to be reduced to any number you wish. But, of course, they will still be revised to actual when the Return is eventually filed. The revised amounts are still capped at the maximum originally calculated.
To stop taxpayers unreasonably claiming excessive reductions, if you tell HMRC to reduce the payments by too much then you will be liable for penalties. Firstly, there will be a 5% surcharge on the underpaid tax. Secondly, interest will run on late payment.
The penalties
As an example, after submitting your Return your PoA were calculated at £2,000 each. Later you estimated they should be reduced to £800. Finally, when you submitted your Tax Return in September the actual liability was £1,300 each.
As a result you have underpaid by £500 in your January 2021 payment (£1,300-800). You will have to pay a 5% late payment penalty for not paying the £500 due by 28 February 2021. And another 5% for not paying by 31 August 2021. Plus interest. Oh yes, and another 5% on the late July instalment of the next £500; plus interest.
Here’s a tactic for the Payments on Account…
You leave the Payments on Account a bit on the higher side to avoid the 5% surcharge and then agree the 11 month payment plan with HMRC.
After submitting the 2020/21 Return your debt will be reduced further down to the actual amount, avoiding any late payment penalties.
Your remaining payments to settle the debt agreement then reduce, and you can still pay the new balance over the remaining months.
This course of action would be very helpful if there is great uncertainty about your income for the remainder of the current tax year, and especially to help you avoid penalties.
Don’t rush into it
While you can reduce the Payments on Account at any time it would be rash to rush into this and reduce them too far.
If you estimate the PoA too low then you can reinstate the Payments on Account. But this is going to cause chaos within your HMRC tax record. There is no guarantee that a late payment surcharge won’t arise. And you may not be able to reschedule the extra tax over the remaining months.
If you consider the scenario that you reduce the PoA in February from £2,000 to £800 and agree the payment schedule for remainder of the year. In March you get a bonus and the PoA should have been £1,300. Trying to increase the monthly payment is going to be a mess to arrange. You would be much better to wait until April to file your Return early and/or reduce the Payments on Account and then discuss reducing the monthly payments with HMRC. This should also avoid the late payment penalties.
Of course, this advice all assumes that HMRC process everything correctly and also don’t change the rules.
Need more information? Then contact our tax team to discuss your options.
