Interest applied where payments on account are lower than actual assessment?

Sherbertfizz

Hi
Apologies, another confused self-assessment virgin here.  I was a sole trader until January 2024, when the business closed.  23/24 tax return submitted by accountant, who assessed likely 24/25 income tax on account as two payments of £739.80 payable 31 Jan 25 and 31 July 25.  My only income since ceasing to be a sole trader is a state pension and small occupational pension, where income tax is deducted through PAYE.

Got divorced last year, and received clean break sum in March 2024, intended for a home purchase. I had expected to have bought long before now but health issues have hampered the process, so I have accrued a largish sum in interest from the monies held in savings accounts (most of it going on rent!).  I wanted to get my self assessment for 24/25 done asap, and began the process online today.  My 24/25 liability has been assessed at £4734.80. 

I rang HMRC because I wanted to make sure that I had completed my assessment accurately before submitting and had a couple of questions.  Completely thrown by the adviser I spoke with taking a somewhat hostile approach and telling me that I would have to pay interest for having 'reduced' my payments on account to below the actual assessment for 24/25.  I explained that this was not a reduction, but an assessment my then accountant had made based on the information available at the time.  The high interest payments could not have been predicted because I intended to use the money to buy a home and thought it would only be on deposit for a few months at most.  I asked for details of what the interest would be, and whether I could increase my next payment on account to pre-empt interest being applied but was told this was not possible. I was cut off at this point (after being on the phone for 1hr 20 minutes) and have been left feeling very anxious about where to go from here.  Does anyone know if what she is saying is accurate, or the best approach from here?  Sorry for the long ramble and I hope it makes sense. Thanks in advance.

Dazed_and_C0nfused

Sherbertfizz said:

Hi
Apologies, another confused self-assessment virgin here.  I was a sole trader until January 2024, when the business closed.  23/24 tax return submitted by accountant, who assessed likely 24/25 income tax on account as two payments of £739.80 payable 31 Jan 25 and 31 July 25.  My only income since ceasing to be a sole trader is a state pension and small occupational pension, where income tax is deducted through PAYE.

Got divorced last year, and received clean break sum in March 2024, intended for a home purchase. I had expected to have bought long before now but health issues have hampered the process, so I have accrued a largish sum in interest from the monies held in savings accounts (most of it going on rent!).  I wanted to get my self assessment for 24/25 done asap, and began the process online today.  My 24/25 liability has been assessed at £4734.80. 

I rang HMRC because I wanted to make sure that I had completed my assessment accurately before submitting and had a couple of questions.  Completely thrown by the adviser I spoke with taking a somewhat hostile approach and telling me that I would have to pay interest for having 'reduced' my payments on account to below the actual assessment for 24/25.  I explained that this was not a reduction, but an assessment my then accountant had made based on the information available at the time.  The high interest payments could not have been predicted because I intended to use the money to buy a home and thought it would only be on deposit for a few months at most.  I asked for details of what the interest would be, and whether I could increase my next payment on account to pre-empt interest being applied but was told this was not possible. I was cut off at this point (after being on the phone for 1hr 20 minutes) and have been left feeling very anxious about where to go from here.  Does anyone know if what she is saying is accurate, or the best approach from here?  Sorry for the long ramble and I hope it makes sense. Thanks in advance.

That is the gamble you take by making a claim to reduce POA.

POA are not linked to a source of income, the fact that one source stopped and you got a lot more interest is of no relevance.

Ultimately these are your tax affairs, not your accountants.

The sooner you pay the tax due the less the interest you will be charged will be.

What were the original POA for 2024-25?  The amount of each one, not the total.

You will not be charged interest for the July POA providing you pay that in full on time.

Sherbertfizz

Dazed_and_C0nfused said:

Sherbertfizz said:

Hi
Apologies, another confused self-assessment virgin here.  I was a sole trader until January 2024, when the business closed.  23/24 tax return submitted by accountant, who assessed likely 24/25 income tax on account as two payments of £739.80 payable 31 Jan 25 and 31 July 25.  My only income since ceasing to be a sole trader is a state pension and small occupational pension, where income tax is deducted through PAYE.

Got divorced last year, and received clean break sum in March 2024, intended for a home purchase. I had expected to have bought long before now but health issues have hampered the process, so I have accrued a largish sum in interest from the monies held in savings accounts (most of it going on rent!).  I wanted to get my self assessment for 24/25 done asap, and began the process online today.  My 24/25 liability has been assessed at £4734.80. 

I rang HMRC because I wanted to make sure that I had completed my assessment accurately before submitting and had a couple of questions.  Completely thrown by the adviser I spoke with taking a somewhat hostile approach and telling me that I would have to pay interest for having 'reduced' my payments on account to below the actual assessment for 24/25.  I explained that this was not a reduction, but an assessment my then accountant had made based on the information available at the time.  The high interest payments could not have been predicted because I intended to use the money to buy a home and thought it would only be on deposit for a few months at most.  I asked for details of what the interest would be, and whether I could increase my next payment on account to pre-empt interest being applied but was told this was not possible. I was cut off at this point (after being on the phone for 1hr 20 minutes) and have been left feeling very anxious about where to go from here.  Does anyone know if what she is saying is accurate, or the best approach from here?  Sorry for the long ramble and I hope it makes sense. Thanks in advance.

That is the gamble you take by making a claim to reduce POA.

POA are not linked to a source of income, the fact that one source stopped and you got a lot more interest is of no relevance.

Ultimately these are your tax affairs, not your accountants.

The sooner you pay the tax due the less the interest you will be charged will be.

What were the original POA for 2024-25?  The amount of each one, not the total.

You will not be charged interest for the July POA providing you pay that in full on time.

Thanks so much for taking the time to reply, Dazed_and_C0nfused.  The original POA was 1793.10 due on 31 Jan 25, which was reduced by my accountant to 813.10.  I can't see a figure on my statement for the July payment but assume it would have been the same.  Without the interest from savings, my tax liability on pension income is below £700 for the year and that is collected through PAYE.  I paid the POA of 813.10, together with the balancing payment for 23/24 in January 25, and will pay the same POA amount by end of July.  I have made all requested payments in good time, but am unclear about how HMRC will apply interest (as the adviser insisted it would be) through my tax liability increasing as a result of the unexpectedly high interest received on the capital set aside for a property purchase. 

Dazed_and_C0nfused

Sherbertfizz said:

Dazed_and_C0nfused said:

Sherbertfizz said:

Hi
Apologies, another confused self-assessment virgin here.  I was a sole trader until January 2024, when the business closed.  23/24 tax return submitted by accountant, who assessed likely 24/25 income tax on account as two payments of £739.80 payable 31 Jan 25 and 31 July 25.  My only income since ceasing to be a sole trader is a state pension and small occupational pension, where income tax is deducted through PAYE.

Got divorced last year, and received clean break sum in March 2024, intended for a home purchase. I had expected to have bought long before now but health issues have hampered the process, so I have accrued a largish sum in interest from the monies held in savings accounts (most of it going on rent!).  I wanted to get my self assessment for 24/25 done asap, and began the process online today.  My 24/25 liability has been assessed at £4734.80. 

I rang HMRC because I wanted to make sure that I had completed my assessment accurately before submitting and had a couple of questions.  Completely thrown by the adviser I spoke with taking a somewhat hostile approach and telling me that I would have to pay interest for having 'reduced' my payments on account to below the actual assessment for 24/25.  I explained that this was not a reduction, but an assessment my then accountant had made based on the information available at the time.  The high interest payments could not have been predicted because I intended to use the money to buy a home and thought it would only be on deposit for a few months at most.  I asked for details of what the interest would be, and whether I could increase my next payment on account to pre-empt interest being applied but was told this was not possible. I was cut off at this point (after being on the phone for 1hr 20 minutes) and have been left feeling very anxious about where to go from here.  Does anyone know if what she is saying is accurate, or the best approach from here?  Sorry for the long ramble and I hope it makes sense. Thanks in advance.

That is the gamble you take by making a claim to reduce POA.

POA are not linked to a source of income, the fact that one source stopped and you got a lot more interest is of no relevance.

Ultimately these are your tax affairs, not your accountants.

The sooner you pay the tax due the less the interest you will be charged will be.

What were the original POA for 2024-25?  The amount of each one, not the total.

You will not be charged interest for the July POA providing you pay that in full on time.

Thanks so much for taking the time to reply, Dazed_and_C0nfused.  The original POA was 1793.10 due on 31 Jan 25, which was reduced by my accountant to 813.10.  I can't see a figure on my statement for the July payment but assume it would have been the same.  Without the interest from savings, my tax liability on pension income is below £700 for the year and that is collected through PAYE.  I paid the POA of 813.10, together with the balancing payment for 23/24 in January 25, and will pay the same POA amount by end of July.  I have made all requested payments in good time, but am unclear about how HMRC will apply interest (as the adviser insisted it would be) through my tax liability increasing as a result of the unexpectedly high interest received on the capital set aside for a property purchase. 

The interest charge for late payment and your Self Assessment liability are two totally separate things.

Based on what you have posted your 2024-25 POA will be reinstated to the original figures (they cannot exceed those unless you amended your 2023-24 return for some reason and that resulted in increased POA being due for 2024-25).

So your 2024-25 liability will be payable as follows,

31 January 2025 £1,793.10
31 July 2025 £1,793.10
31 January 2026 £1,148.60

As you only paid £813.10 towards the January 2025 POA, interest will be charged on the extra £980 for the period from 1 February 2025 to whenever you actually pay it.  

There have been three different interest rates already during that period (7.25%, 7.00% and 8.50%) so you are probably looking at an interest charge of at least £20. Assuming you pay the £980 ASAP (and the second POA in full on time). The interest charge will be a separate entry on your Self Assessment account.

Sherbertfizz

Really appreciate you going into such detail Dazed_and_C0nfused.  I think I'm beginning to get it now - panic over tax issues freezes my (already limited) cognitive functioning! I'll get onto the extra payments pronto.  Huge thank you. Without your help, I'd probably have put my head in the sand until the last minute and be looking at much higher interest payments.  You're a star.

Sarahspangles

Dazed_and_C0nfused said:

The interest charge for late payment and your Self Assessment liability are two totally separate things.

Based on what you have posted your 2024-25 POA will be reinstated to the original figures (they cannot exceed those unless you amended your 2023-24 return for some reason and that resulted in increased POA being due for 2024-25).

So your 2024-25 liability will be payable as follows,

31 January 2025 £1,793.10
31 July 2025 £1,793.10
31 January 2026 £1,148.60

As you only paid £813.10 towards the January 2025 POA, interest will be charged on the extra £980 for the period from 1 February 2025 to whenever you actually pay it.  

There have been three different interest rates already during that period (7.25%, 7.00% and 8.50%) so you are probably looking at an interest charge of at least £20. Assuming you pay the £980 ASAP (and the second POA in full on time). The interest charge will be a separate entry on your Self Assessment account.

Would the OP also have some starter savings band available for some of the tax on interest? PAYE of £700 would suggest pension income of ~ £16,070.

Dazed_and_C0nfused

Sarahspangles said:

Dazed_and_C0nfused said:

The interest charge for late payment and your Self Assessment liability are two totally separate things.

Based on what you have posted your 2024-25 POA will be reinstated to the original figures (they cannot exceed those unless you amended your 2023-24 return for some reason and that resulted in increased POA being due for 2024-25).

So your 2024-25 liability will be payable as follows,

31 January 2025 £1,793.10
31 July 2025 £1,793.10
31 January 2026 £1,148.60

As you only paid £813.10 towards the January 2025 POA, interest will be charged on the extra £980 for the period from 1 February 2025 to whenever you actually pay it.  

There have been three different interest rates already during that period (7.25%, 7.00% and 8.50%) so you are probably looking at an interest charge of at least £20. Assuming you pay the £980 ASAP (and the second POA in full on time). The interest charge will be a separate entry on your Self Assessment account.

Would the OP also have some starter savings band available for some of the tax on interest? PAYE of £700 would suggest pension income of ~ £16,070.

Possibly but that would have automatically been factored into the Self Assessment calculation so there's no reason to doubt this.

I wanted to get my self assessment for 24/25 done asap, and began the process online today. My 24/25 liability has been assessed at £4734.80.