Reducing payments on account
Under self assessment, a taxpayer may need to make payments on account of the current year’s tax liability. With the second payment on account for 2012/13 due by 31 July 2013, you may be able to reduce your payments and benefit from a cash flow advantage.
Payments on account: the basics
Payments on account are generally based on the previous year’s tax bill and, where relevant, Class 4 national insurance contributions (NICs). You are not required to make payments on account if your total net tax bill for the previous year was less than £1,000 or if more than 80% of the previous year’s tax was deducted at source, even if the tax due exceeded £1,000.
Standard payments are set at 50% of the previous year’s tax and Class 4 NICs liability and are payable in two equal instalments – on 31 January in the tax year and 31 July after the end of the tax year. CGT and student loan repayments are excluded from the computation and are payable as part of the balancing payment on 31 January following the tax year.
A planning opportunity?
The payment on account calculation assumes that the current year’s liability will be the same as the previous year. However, where you suspect that the tax liability for the current year will be lower than the previous year, for example because your income has fallen due to a slump in business, you can apply to have your payments on account reduced.
Ben is a self-employed plumber. He has a tax and Class 4 NIC liability of £1,800 for 2012/13. Based on his 2012/13 liability, he is due to make his 2013/14 payments on account of £900 on both 31 January 2013 and 31 July 2013.
However, Ben reduced his workload in June 2012. He estimates that his tax and Class 4 NIC liability for 2012/13 is £1,200 and makes an application to reduce his payments on account accordingly. He is therefore required to make payments on account of £600 on both 31 January 2013 and 31 July 2013.
To claim a reduction we will need details of income, expenses and deductions for 2012/13 – in essence your 2013 Tax Return and accounting information – together with estimates of any figures that are not yet available. We can then prepare draft figures and make the claim, which will be backdated to cover the 31 January payment on account.
A claim to reduce payments on account can be made at any time. If the claim is submitted after a payment on account has been made, the excess will be refunded. Note that interest will be charged, and penalties are also possible, if your actual liability is more than the reduced amount paid on account.
Avoiding additional penalties
If your 2012 Tax Return has not yet been filed, 31 July also marks the deadline for an additional late filing penalty of the higher of £300 or 5% of the tax due (in addition to a series of penalties already imposed for not filing your Return on time). Late filing also often results in late payment, with consequent interest and penalties applying.
With this key date in mind, please ensure that you provide us with all outstanding information, and we will provide tailored advice to suit your individual circumstances.