24 Jan Self Assessment: Could you Reduce your Payments on Account?
It is likely that your tax bill due at the end of this month is made up of two components. The first part is your tax liability based on profits for the year ended 5 April 2016. The other is the first “Payment-on-Account” for the tax year ended 5th April 2017. Could there be the option to reduce your Payment-on-Account to help cash flow this month?
Why do you have to make Payments on Account?
Before considering whether you can reduce your Payments-on-Account, it helps to understand why you have to pay them in the first place.
Essentially, it is related to timing, because when you are taxed under self-assessment, there is as much as a 22-month delay from when you earn the income to when you pay the tax.
Income earned in April 2015, is only now featuring on a tax return, with a deadline for payment of 31 January 2017.
This applies for dividend income, rental income, locum income, self-employed income and other earnings not taxed under PAYE.
Therefore HMRC implement the Payment-on-Account system to level the playing field, and to reduce this gap.
Most taxpayers get frustrated by this system regardless, but this is the logic behind the reasoning.
Can you refuse to pay in advance?
The Payment-on-Account proportion of your tax bill in January does not come with any penalties attached for not paying. Neither are surcharges issued.
However, if you choose not to pay it, and when you file next the tax return for the year ended 5 April 2017, the figures show that the payment in advance was correct and due, then interest will be charged on top of the payment.
Therefore, wherever possible it is more cost-effective, in the long-term, to play by the rules and pay the Payment-on-Account in advance.
It may be possible to reduce your Payments on Account
Payments on Account are based on estimates. It assumes that your income and profit remains exactly the same year-on-year.
The Payment-on-Account due as part of your January 2017 tax payment, will be based on profits for the year ended 5 April 2016.
If you believe your profits to be less in this current financial year to 5 April 2017, there could be grounds to reduce your Payments on Account, and ease cash flow.
To assess this properly, it is essential to review the management accounts for the year to date.
- Are your anticipated profits from 6 April 2016 to date, less than last year for the same period?
- Is it likely that your final profits for the year ended 5 April 2017 will be less than those for the year ended 5 April 2016?
- As there are still two months left in this tax year, are you planning any large expenses that could reduce your taxable profit? Is there any reason why your income may fall in the next two months?
Seek help and advice if in doubt