Should I Reduce My Payments On Account?

Sarah Bradford explains when you may want to reduce your self-assessment payments on account, and the consequences of getting it wrong.

Under self-assessment, payments on account of the current year’s liability are due on 31 January in the tax year, and on 31 July after the end of the tax year. To the extent that any further tax is due, the balance must be paid by 31 January after the end of the tax year. 

Taxpayers are required to make payments on account towards the current year’s tax liability unless the tax due for the previous year was less than £1,000, or at least 80% of it was collected at source (for example, under PAYE). Each payment on account is one half of the tax and Class 4 National Insurance contributions liability for the previous tax year. 

John in a self-employed painter and decorator. In 2012/13, his total tax and Class 4 National Insurance contributions bill was £3,400. None was collected at source.

As the tax and Class 4 National Insurance for 2012/13 was more than £1,000, John is required to make payments on account of his 2013/14 liability. Each payment is 50% of the previous year’s liability. 

Consequently, John is required to make payments on account for 2013/14 of £1,700 each (i.e. 50% of £3,400) on 1 January 2014 and on 31 July 2014. Any balancing payment is due by 31 January 2015.

Tax liabilities fluctuate from year to year, and the tax payable for the current year may be more or less than that payable in the previous year. There are a number of reasons why a person’s tax bill may be less than in the previous year. For example, the person may cease self-employment part way through the year, there may be a downturn in business or a person may receive lower dividends or untaxed interest than in the previous year. Where this is the case and payments on account are made by reference to the previous year’s liability, tax will be overpaid. 

While any overpaid tax will eventually be repaid (plus interest at 0.50%), most people would prefer not to overpay in the first place. HMRC recognise this and the facility exists for a taxpayer to reduce his or her payments on account where current year income is likely to be less than in the previous tax year.

A taxpayer can make a claim to reduce his or her payments on account in various ways. A claim can be made on the calculation pages of the self-assessment tax return or can be made online via HMRC’s Self-Assessment Online Service. HMRC also produce a designated form for this purpose – form SA303 – which is available to download from the HMRC website (see www.hmrc.gov.uk/sa/forms/sa303.pdf).

John breaks his leg in July 2013, and is unable to work for three months. As a result his income falls and he expects his income tax and Class 4 NIC liability for 2013/14 to be around £2,000. 

He reduces each payment on account to £1,000, making the claim online. As a result he makes payments on account of £1,000 rather than £1,700 on 31 January 2014 and on 31 July 2014.

If you know your tax liability will be less than in the previous tax year, make a claim to reduce your payments on account rather than overpaying and claiming a subsequent refund. The rate of interest on overpaid tax is low.

Estimating your tax liability in advance is not an exact science, and it is easy to get it wrong. If you expect your income to fall and you reduce your payments on account on this basis, but it turns out that the tax liability is higher than you thought, you will be charged interest to the extent that the payments on account were less than they should have been. HMRC may also charge a penalty if you did not take reasonable care. 

Tell HMRC as soon as possible if you realise that you have reduced your payments on account by too much and pay the shortfall to reduce the interest payable.

Beware of the temptation to reduce your payments on account by too much to delay the payment of tax – you will be charged interest if your payments on account are too low, and as indicated above you may also be charged a penalty.

Review your tax position and adjust your payments on account so that they accurately reflect your best estimate of the current year’s liability.