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You may not need to pay all of your second self-assessment payment on account if your liability for 2015/16 is less than it was the previous year.

Introduction

If you are in the self-assessment tax system, then you may be due to pay your second payment on account for the year ended 5 April 2016 by 31 July 2016. But you may not need to pay all of it, or indeed any of it, if your liability for 2015/16 is less than it was the previous year.

Self-assessment – payments on account

If you fill in a tax return each year, you might need to pay towards the following year’s income tax and class 4 National Insurance (NIC) – known as ‘payments on account’. There are two payment dates – 31 January and 31 July. Each payment is half of the amount due for the previous year. You can find out more about payments on account in general in the LITRG factsheet ‘First year in self-assessment? Don’t get caught out by payments on account’ (available on the LITRG’s website in the ‘Tax Guides – Self-employment’ section – see Useful Links below).

If you need to make payments on account for the 2015/16 tax year, you should have already made one payment by 31 January 2016. You will normally owe the same amount by 31 July 2016.

Why might I be able to reduce payments on account?

If:

• you think your tax bill will be less for 2015/16 than 2014/15, because you had less self-employment income for example, or
• you have actually done your tax return for 2015/16 and know you owe less this year than last year,

it is possible to claim to HMRC to reduce your payments on account (for 2015/16 payments on account, you can actually do this until 31 January 2017).

You need a reasonable estimate of the amount you owe in order to reduce your payments on account. If it turns out that you have reduced them too much, you could face interest charges and even a penalty if the claim was fraudulent or negligent. The best way to make sure that this does not happen is to be certain of your figures by filing your tax return. You can find more information to help you do this on the LITRG website (see Useful Links below).

Any reduction will be applied to both payments. This could mean that you paid too much in January – that extra amount can help to cover the reduced July payment, or mean you have nothing to pay. The best way of explaining this is by looking at some examples:

Example – Cath

Cath is a self-employed sports masseuse. She has a tax and class 4 NIC liability of £1,800 for 2014/15. Based on her 2014/15 liability, her 2015/16 payments on account are £900 each – one due on 31 January 2016 and one due on 31 July 2016.

During 2015/16, Cath’s workload decreased. Although she has not done her tax return yet, she has looked carefully at her income and expenses and estimates that her tax and Class 4 NIC liability for 2015/16 is £1,200. She makes an application to reduce her payments on account to £600 each. As she paid the full £900 in January, she only needs to pay £300 by 31 July 2016. Cath can find all the options for payment on GOV.UK (see Useful Links below).

Example – Manjit

Manjit is a self-employed bookkeeper. She has a tax and class 4 NIC liability of £3,000 for 2014/15. Based on her 2014/15 liability, her 2015/16 payments on account are £1,500 each – one due on 31 January 2016 and the other due on 31 July 2016.

Manjit paid her first payment on account as normal, but due to an accident shortly after that, stopped working. By preparing her 2015/16 tax return early, she knows her tax and class 4 NIC liability for 2015/16 is £1,400. She therefore makes an application to reduce her payments on account to £700 each. As she has already paid £1,500 in January, she does not need to pay anything in July 2016. In fact, she has still paid £100 too much, which will now be refunded. If HMRC do not do this automatically, then Manjit can trigger this to happen as described on GOV.UK.

How do I reduce my payments on account?

You can reduce your payments on account by filling in a SA303 form or, if you file your tax return online, by logging into your HMRC online services account and clicking ‘Reduce my payments on account’. You can find the form, and link to online services via GOV.UK.

You must tell HMRC if you want to reduce your payments on account. If you simply pay a lower amount to HMRC, this will show on their systems that you have not paid enough and it is likely that they will contact you.

Useful links

LITRG tax guide on self-employment
Help from GOV.UK (see Income Tax and Self-Assessment Tax Returns)