Tax payments on account 19 December 2022 at 1:38AM edited 19 December 2022 at 1:39AM in Cutting tax 26 replies 585 views

Steve182

I've just completed my self assessment. I'm obliged to pay circa £6K in additional tax by end Jan. fair enough

They are also demanding (or requesting) a further £3K on account for the next tax year by 31 Jan, so I need to pay £9K instead of £6K next month, with a further demand for £3K more in July. This would mean my 2022 tax bill, if identical to 2021 would be paid in full 6 months earlier than normal.

I've protested as this is not something I expected/budgeted on. A further £3K payment in Jan is simply something I cannot afford right now.

What are the legalities here?

Dazed_and_C0nfused

They are perfectly normal (and legal).

https://www.gov.uk/hmrc-internal-manuals/self-assessment-legal-framework/salf303

Given we are nearly three quarters of the way through the 2022:23 tax year you will presumably have some idea what your tax liability will be for 2022:23.

If you think it will be less than £6k them you are perfectly entitled to make a claim to reduce the 2022:23 POA.

For exame if you think the liability could be £5k then you would reduce each POA to £2,500.

If you get this wrong and the actual liability is greater than £5k then each POA will be increased back to a maxum of the original £3k and you will be charged late payment interest from the original date the tax should have been paid.

The_Fat_Controller

It's a pain but perfectly normal and legal in your situation.

Although you are paying your tax liability earlier than you normally would, you are still paying it after the end of the relevant tax year.

As above you can ask to reduce your POA and see what happens.

purdyoaten2

Steve182 said:

I've just completed my self assessment. I'm obliged to pay circa £6K in additional tax by end Jan. fair enough

They are also demanding (or requesting) a further £3K on account for the next tax year by 31 Jan, so I need to pay £9K instead of £6K next month, with a further demand for £3K more in July. This would mean my 2022 tax bill, if identical to 2021 would be paid in full 6 months earlier than normal.

I've protested as this is not something I expected/budgeted on. A further £3K payment in Jan is simply something I cannot afford right now.

What are the legalities here?

There is some confusion regarding the tax years. The payment of £6000 is actually a balancing payment for 2021/22, not 2020/21. The payments on account of £3000 each relate to 2022/23 not 2021/22. Using calendar years such as 2022 complicates matters. 

It could well be that this is the first occasion that payments on account are required and this has caused your angst. But it is correct and has always been the methodology since self-assessment came into being 25 years ago. 

Bear in mind also that these are not advance payments- the tax year 2022/23 is almost over and, unlike most taxpayers, you have yet to pay any tax for that year. As Dazed says - make a calculation of your 2022/23 liability and reduce the £6000 (£3000 each) if you believe them to be way off the mark. 

Steve182

Thanks for the replies.

This is the first time I've been asked to make payments on account, and if such demands are normal (which I don't dispute), I'm just surprised I've not been asked for payments on account on previous years when I've also had a significant additional tax liability on completing the return.

purdyoaten2

Steve182 said:

Thanks for the replies.

This is the first time I've been asked to make payments on account, and if such demands are normal (which I don't dispute), I'm just surprised I've not been asked for payments on account on previous years when I've also had a significant additional tax liability on completing the return.

Is this the first time that the amount owed is more than £1000? Or, more likely, is this the first time that the amount owed is more than 20% of your total tax liability (including under PAYE)? 

For example:

Total amount payable £6000. 

Total liability for year £25000 including £19000 paid under PAYE. 

£6000 is more than 20% of £25000 - payments on account are due!

Grumpy_chap

Steve182 said:

This would mean my 2022 tax bill, if identical to 2021 would be paid in full 6 months earlier than normal.

It is not really paying earlier than normal to make payments on account.

If you were under PAYE, the tax would be paid in full by end March 2022 (for tax year 2021 - 22).  (Strictly 5th April 2022.)

As you are not under PAYE, you are paying this £6k from tax year 2021 - 22 and it must be paid by end January 2023.  That is 10 months interest free credit on that payment, which is called the "balancing payment"

Also in January, you are asked to make a "payment on account" of 50% the same forecast tax for the current tax year (2022 - 23).  That is another £3k.

Had you been on PAYE, that £3k would have been paid through monthly deductions and all paid by end September 2022.  You are getting 4 months interest free credit.

Then the second "payment on account" is £3k and needs to be paid by the end of July 2023.  This compares to all being paid by end March 2023 if under PAYE.  Another opportunity for at least 4 months interest free credit.

Then, if there is an adjustment, you prepare your tax return and any "balancing payment" has to be made by end January 2024 (benefitting from 10 months interest free credit).  If you overpaid, then you will receive a refund.

The payments on accounts process works reasonably well, but does have a lag built in when there is a change in circumstances.  Obviously, this can be mitigated if tax return is submitted quickly after the end of the tax year.

Steve182

purdyoaten2 said:

Steve182 said:

Thanks for the replies.

This is the first time I've been asked to make payments on account, and if such demands are normal (which I don't dispute), I'm just surprised I've not been asked for payments on account on previous years when I've also had a significant additional tax liability on completing the return.

Is this the first time that the amount owed is more than £1000? Or, more likely, is this the first time that the amount owed is more than 20% of your total tax liability (including under PAYE)? 

For example:

Total amount payable £6000. 

Total liability for year £25000 including £19000 paid under PAYE. 

£6000 is more than 20% of £25000 - payments on account are due!

I am PAYE and the additional £6K is for dividends, which is >20% of my total tax liability.

Now you mention it we did not pay/take dividends in the 20-21 tax year due to covid, so no request for payment on account

The previous year I had a significant tax bill from non PAYE income but it was mainly capital gain and therefore extraordinary.

The two years prior to that I put profits in pension

So what you explained makes perfect sense.   

purdyoaten2

Steve182 said:

purdyoaten2 said:

Steve182 said:

Thanks for the replies.

This is the first time I've been asked to make payments on account, and if such demands are normal (which I don't dispute), I'm just surprised I've not been asked for payments on account on previous years when I've also had a significant additional tax liability on completing the return.

Is this the first time that the amount owed is more than £1000? Or, more likely, is this the first time that the amount owed is more than 20% of your total tax liability (including under PAYE)? 

For example:

Total amount payable £6000. 

Total liability for year £25000 including £19000 paid under PAYE. 

£6000 is more than 20% of £25000 - payments on account are due!

I am PAYE and the additional £6K is for dividends, which is >20% of my total tax liability.

Now you mention it we did not pay/take dividends in the 20-21 tax year due to covid, so no request for payment on account

The previous year I had a significant tax bill from non PAYE income but it was mainly capital gain and therefore extraordinary.

The two years prior to that I put profits in pension

So what you explained makes perfect sense.   

Thank you. Any dividends for 2022/23? If not, it would be reasonable to reduce payments on account to zero if you can be sure that you will have no underpayment at PAYE.

By the way - Capital gains are excluded from payments on account calculations.

Steve182

purdyoaten2 said:

Steve182 said:

purdyoaten2 said:

Steve182 said:

Thanks for the replies.

This is the first time I've been asked to make payments on account, and if such demands are normal (which I don't dispute), I'm just surprised I've not been asked for payments on account on previous years when I've also had a significant additional tax liability on completing the return.

Is this the first time that the amount owed is more than £1000? Or, more likely, is this the first time that the amount owed is more than 20% of your total tax liability (including under PAYE)? 

For example:

Total amount payable £6000. 

Total liability for year £25000 including £19000 paid under PAYE. 

£6000 is more than 20% of £25000 - payments on account are due!

I am PAYE and the additional £6K is for dividends, which is >20% of my total tax liability.

Now you mention it we did not pay/take dividends in the 20-21 tax year due to covid, so no request for payment on account

The previous year I had a significant tax bill from non PAYE income but it was mainly capital gain and therefore extraordinary.

The two years prior to that I put profits in pension

So what you explained makes perfect sense.   

Thank you. Any dividends for 2022/23? If not, it would be reasonable to reduce payments on account to zero if you can be sure that you will have no underpayment at PAYE.

By the way - Capital gains are excluded from payments on account calculations.

Fortunately (or unfortunately for tax purposes)  I have received similar dividends thus far in the current tax year, so the claim for this level of payment on account is reasonable. 

I don't have an issue with it in principle, It's just that I've made no provision for it, not expecting to have to pay it so soon. I'll not get caught out again!  

purdyoaten2

Steve182 said:

purdyoaten2 said:

Steve182 said:

purdyoaten2 said:

Steve182 said:

Thanks for the replies.

This is the first time I've been asked to make payments on account, and if such demands are normal (which I don't dispute), I'm just surprised I've not been asked for payments on account on previous years when I've also had a significant additional tax liability on completing the return.

Is this the first time that the amount owed is more than £1000? Or, more likely, is this the first time that the amount owed is more than 20% of your total tax liability (including under PAYE)? 

For example:

Total amount payable £6000. 

Total liability for year £25000 including £19000 paid under PAYE. 

£6000 is more than 20% of £25000 - payments on account are due!

I am PAYE and the additional £6K is for dividends, which is >20% of my total tax liability.

Now you mention it we did not pay/take dividends in the 20-21 tax year due to covid, so no request for payment on account

The previous year I had a significant tax bill from non PAYE income but it was mainly capital gain and therefore extraordinary.

The two years prior to that I put profits in pension

So what you explained makes perfect sense.   

Thank you. Any dividends for 2022/23? If not, it would be reasonable to reduce payments on account to zero if you can be sure that you will have no underpayment at PAYE.

By the way - Capital gains are excluded from payments on account calculations.

Fortunately (or unfortunately for tax purposes)  I have received similar dividends thus far in the current tax year, so the claim for this level of payment on account is reasonable. 

I don't have an issue with it in principle, It's just that I've made no provision for it, not expecting to have to pay it so soon. I'll not get caught out again!  

The good news could be that, if your liability is £6000, you will only have to pay a payment on account of £3000 in January 2024 - no balancing payment.