Income Tax from rented out property - pay it in arrears?

ackoman

Hi,

I rent out a property, the profit from which I declare on my tax return - depending on the level of profit that year, sometimes I've had to pay this in two instalments over the next FY, on other occasions I've been able to add it to my PAYE code and they gather the tax out of my salaried earnings.

My wife has been trying to convince me that I should not ever get this tax recovered via my PAYE code. She would rather my monthly take home pay is unaffected by the flat I rent out, and would rather that the tax I owe due to the flat income is paid separately. Her preference, and I'm coming around to her way of thinking, is that our job earnings and our flat earnings are kept completely separate from one another. The question I've got is this - is that even possible? Are HMRC happy for you to leave your PAYE tax code as the standard, such that only the income tax due as a result of a job is gathered that way, and for any other owed tax to be paid separately?

Any advice would be much appreciated.

Ackoman

unholyangel

The two instalments would probably be payments on account, which are advance payments towards the next years liability. The one through the code would be a balancing payment - payment of a previous years liability. 

If you do not have it collected via your code, it will be due on the 31st Jan - so for the 19/20 year would be due in full by 31st Jan 2021. While if it was in your code, it would be in the 21/22 years code. 

Dazed_and_C0nfused

Yes it's possible.

You either need to file your return after 30 December i.e. you would be too late too have the tax due included in the forthcoming years tax code.  Or tick the relevant box on the return which indicates to HMRC that you don't want it collected via your tax code.

You need to do this on each return you file, not just the next one.

oldbikebloke

you are perfectly entitled to not have your tax adjusted to collect tax you owe. Instead you will pay it as lump sums.

However, it also appears neither of you really understand what is meant by payment on account - the lump sum you pay in July when you have chosen not to have the tax code adjusted.

personally I agree with your wife, I much prefer to pay lump sums at known dates rather than have reduced income every month. But then again, I am financially disciplined and set aside money to pay those lump sums from, so come the time I can pay it, unlike the ill disciplined who forget they still have to pay tax and spend the money instead. 

ackoman

Hi all, 

Thanks for your replies. 

I think I understand now. But I'd just like to check, via a description of my current status. 

Last year, FY19/20, I didn't pay enough tax because I must have chosen the option to not have HMRC collect the tax due to my additional income via my PAYE code. As such, when I submitted my return I was told that not only did I have to pay a lump sum by 31st Jan 2021 in order to cover the underpaid tax for FY 19/20, I also have to pay two lump sums, one on 31st Jan 2021 for a payment on account equal to half of my underpaid amount from FY19/20 and then the other half as a lump sum by 31st July 2021.

If I have understood correctly, when I fill out my next tax return, I can once again choose to not have my additional income taxed through my PAYE code but instead will just have to pay two lump sums on account for the coming year. I assume any corrections, up or down, will be taken into consideration in the following years calculation. 

So, if I have understood all this correctly, the answer to my question in the subject "can I pay my additional tax in arrears", the answer is actually no because the moment I don't pay enough tax in one year, HMRC will demand payments on account for the following year - and payments on account are the exact opposite of paying in arrears, they are actually paying ahead, using figures based on the previous years earnings. 

Have I got that right? 

Thanks, 

Ackoman

Dazed_and_C0nfused

No.

I don't think you have understood the timing of payments on account compared to paying more tax through your tax code.

For example the tax due for 2020:21, the current tax year, will be payable on 31 January 2021 (first POA), 31 July 2021 (2nd POA) and, if necessary, 31 January 2022.

31 January 2021 is roughly three quarters of the way through the 2020:21 tax year.

31 July 2021 is nearly four months after the end of the 2020:21 tax year.

31 January 2022 is nearly 10 months after the end of the 2020:21 tax year.

If you had a deduction in your tax code to collect additional tax (not for arrears from a previous year) then you would start paying more when you got paid in April 2020.

ackoman

Dazed_and_C0nfused said:

No.

I don't think you have understood the timing of payments on account compared to paying more tax through your tax code.

For example the tax due for 2020:21, the current tax year, will be payable on 31 January 2021 (first POA), 31 July 2021 (2nd POA) and, if necessary, 31 January 2022.

31 January 2021 is roughly three quarters of the way through the 2020:21 tax year.

31 July 2021 is nearly four months after the end of the 2020:21 tax year.

31 January 2022 is nearly 10 months after the end of the 2020:21 tax year.

If you had a deduction in your tax code to collect additional tax (not for arrears from a previous year) then you would start paying more when you got paid in April 2020.

Of course! Thanks!