31 July is amongst the most dreaded of days in the self-employed calendar. It is a date on which many are required to pay a tax bill – and on which many realise they have forgotten about it.
This date, which is now fast approaching, hails the second payment on account. This is an oft-misunderstood part of the self-employed tax regime – but it is one that, as a Self Assessment taxpayer, you need to be familiar with.
What is the payment on account?
The payment on account is a way of easing the burden of a tax bill. Rather than paying you entire year’s liability in one go, the payment on account system means that you pay your bill in two instalments.
There are two payment on account dates. These are 31 January (the day on which the Self Assessment is due) and 31 July.
Each payment is equal to half your tax bill for the previous tax year. So, if your total tax bill for the 2010-11 tax year was £5,000, you will owe £2,500 on 31 July. In January you will then make a ‘balancing payment’ if it turns out that you owe more than was projected, along with the first of your next set of two payments on account.
Do I have to pay it?
As a Self Assessment taxpayer, you have to make payments on account unless your total tax due in the previous year (less any tax you might have paid at source, for example through PAYE) was £1,000 of less. You will also be exempt if at least 80 per cent of the tax you paid in the previous tax year was deducted at source.
What if I can’t afford it?
The payment on account causes an annual scramble for cash, as many self-employed people inevitably realise that they haven’t set enough aside.
If you don’t think you’re going to be able to pay the bill, it is important that you contact HMRC as a matter of urgency. They will be better able to help you if you get in touch before the bill is due, and they may be able to arrange payment by instalments.
HMRC is obliged to consider ‘payment proposals’ made by taxpayers. So, if you are unable to pay it all when it’s due but you are confident you could pay it over the coming few weeks, you should phone them and tell them. Remember, though, that if you fail to keep to a payment arrangement, HMRC will begin legal action against you.
You should note that HMRC has become more aggressive in its pursuit of unpaid bills, and legal action is starting earlier and earlier. It is therefore important that you act quickly.
Can I lower my payment on account?
It is sometimes possible to lower the payment on account – but you need to do this by 31 January following the relevant tax year. So, you cannot suddenly decide that you want to reduce the 21 July payment a week before it’s due.
It is generally possible to reduce the payment on account if you think that your taxable income will be lower in the following tax year. You should understand, though, that you may incur penalties if it turns out that your estimates are wrong – and you should therefore generally avoid using this simply as a way of evening out cashflow.
If you are having trouble making your payment on account, you should call HMRC immediately on 0845 366 1204.