Enter Your E-mail

Ward Williams' Erin Walls advises Self Assessment taxpayers on paying their tax liabilities.

Introduction

Tax returns can be hard work. Sometimes, especially in today's business climate, finding the cash to pay the tax can be the biggest problem. I get many questions about Payments on Account (or POAs for short): why do some of us have to make Payments on Account and others don't? How are they calculated? And, can they be avoided? Let’s take a look at the basics.

Who Makes Payments on Account?

If HM Revenue & Customs ask you for ‘Payments on Account’, they’re asking you to pay an estimated bill, based on last year’s bill. It’s similar to the way many electricity boards base estimated bills on past usage.

POAs are applied to anyone with a Self Assessment tax bill of over £1,000 where 80% (or less) of the tax is paid from income deducted at source. That’s usually those with self-employed income, letting income, or other income where tax is not being paid at source.

How Are They Calculated?

POAs assume that your next tax bill will be the same as the last. Thus, someone with a £3,000 final tax bill for 2011/12 has to pay £1,500 on 31st January 2013, and another £1,500 on 31st July 2013. The obvious problem is that very few of us have such evenly spread earnings. Rather, many businesses move between bad years and good years. There are two scenarios:

• Your earnings are up this year: in this case, your POAs may be too low and you’ll have to make up the shortfall at the end of the year. As long as you put aside enough to cover a higher tax demand, you’ll be fine
• Your earnings have fallen in the current year: your POAs may be too high, and you could struggle to pay the estimated tax bill.

What Should You Do if You Can't Make Your Payment on Account?

Firstly, if your income has actually dropped you could reduce payments, so they’re closer to your actual tax liability. Taking the above example, if the taxpayer thinks his 2012/2013 bill will actually be £2,000, his January and July payments could be cut to £1,000.

• If you already know that your profit for the next year will be lower, you should make a note in boxes 10 and 11 of page TC1 of the ‘Tax calculation summary’ form. You also need to include an explanation for the reduction in box 19 of TR7.
• Otherwise the procedure for reducing the due payments is to fill in a form SA303 - 'Self Assessment Claim to Reduce Payments on Account'.

Tax reductions are made to the January and July payments equally. However, if you have already made a full January payment, you can have your July payment reduced to compensate. Again, our example taxpayer’s July payment would be £500 if he had reduced his payments to £2,000, but had already paid £1,500 in January 2013. But note that interest will be due if the POAs have been reduced by too much, and it is also theoretically possible that penalties may be charged if a “Claim to Reduce” has been negligently or fraudulently made.

What Happens if You Don't Pay?

The consequence of not making a POA will be interest charged from the due date (3% p.a. at the time of writing) and reminder letters from HMRC.

Other Options

If you can’t schedule large payments, and don’t want the stress of reminder letters, you can always enter into a Budget Payment Plan. Budget Payment Plans have to be paid by direct debit, and must be agreed by HMRC in advance on an individual case basis.

If you find you cannot make payments when they’re due, then you can enter into a “Time to Pay” arrangement with HMRC. Doing so before the payment is due will help to avoid late payment penalties – you’ll still be charged interest, though.