Planning my tax payments on account

Question.

I am due to make my 2nd Payment on Account before the 31 July 2018, to HM Revenue & Customs. My accountant advised me of my payment for the end of July some time ago but suggested that I could reduce the payment as my business profits have reduced in comparison to last year. What are the implications if I do not pay the full amount due and is there any possibility that I can reduce the amount that is due?

Answer.

Payments on account are 50% of an individual’s net tax liability for the previous year, and are used to “prepay” the tax liability due for that relevant tax year. These payments are due to be made on the 31st January and 31st July each year. All individuals are liable to make these payments unless their net tax liability payable is less than £1,000 or 80% of the tax due for the tax year was deducted at source.

If your income and subsequent tax liability for the 2017/2018 tax year is likely to be significantly less than 2016/2017, you can make a claim to reduce your payments on account. The amount by which you reduce your payments should reflect your estimation of your tax liability for the 2017/18 tax year, which is due to be paid by 31 January 2019.

However, if it is later found that you have reduced the payments on account by too much, you will be liable to pay interest on the difference between the amounts paid as payments on account and the amount actually due. Equally, if you have underestimated the fall and paid too much, you will be due a refund and will receive an interest supplement.

Getting your information to your accountant to allow them to complete your tax return prior to 31 July 2018 will enable them to calculate what your liability will be for 2017/18 and therefore advise you on whether to reduce your payments on account or not and will also help to avoid any shortfall in tax paid by you by 31 January 2019.

Filing you tax return early (before the 31 January deadline) will mean you should receive any tax refund you may be due soon after submission. In instances where you think you have overpaid tax, be sure to get your return in as promptly and early as possible. That way you can obtain your refund sooner. Filing your tax return results in a tax liability calculation and presents you with the total tax bill you owe to HMRC. In that sense doing so earlier means you can plan and give yourself more time for setting money aside for payment. This then allows you to better manage your cash flow and finances.

The advice above is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.