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In this article, Kelly Sizer of the Low Incomes Tax Reform Group looks at some recent and planned changes to how we pay our tax, outlining some of the pros and cons. 

Introduction

As the name suggests, HM Revenue and Customs (‘HMRC’) was formed in 2005 by merging two former government departments – the Inland Revenue (the ‘tax man’) and HM Customs and Excise (the ‘VAT man’). The existence of HMRC can still come as a surprise to many as in general parlance; we still often hear the two former bodies referred to separately. 

Nevertheless, (to quote the Spice Girls!) the two did in fact become one and, ever since, major changes have been taking place. 

So how does this affect how I pay my tax?

For many of us, contact with the tax system is limited. We work as employees and our employer uses the Pay As You Earn (‘PAYE’) system to deduct tax from our wages. We might also have a bit of cash in the bank earning interest from which tax is deducted before we get it. And indeed, for the majority, this system tends to work without significant glitches. 

But if for example you have a source of income which is not taxed before you get your hands on it, things start to become a little more complicated. Say you are self-employed; you will need to tell HMRC that you are working for yourself and fill in a self assessment tax return each year and pay the tax direct.  It is the self assessment taxpayer with whom we are concerned here. 

Budgeting for tax payments

Under self assessment, tax payments are ‘lumpy’, as they are only made once or twice a year – at the end of January, or January and July. This can make budgeting for payments difficult, as it means having the discipline to save up the cash in the meantime. 

HMRC have started to appreciate this difficulty more and more in recent years and have introduced some measures which could help:

• You can now pay your tax by credit card;
• You can set up a direct debit to pay your tax by regular instalments in advance of the due date – a Budget Payment Plan;
• If you have overpaid tax in one area but have a liability in another, you can ask HMRC to offset the overpayment against the amount owed.

Watch out, however, for the potential pitfalls in this brave new world:

• HMRC must not try to pressurise you into paying by credit card.  If you have no other means of payment, try to negotiate with HMRC for time to pay instead (see ‘Help! I can’t pay’ below) as payment by credit card incurs a transaction fee and you could end up paying substantially more interest than that charged by HMRC.
• Take into account the pros and cons, for example with the Budget Payment Plan you will be parting with your cash early, but HMRC don’t give you any interest. This is particularly unfair for student loan borrowers repaying via self assessment who could still be clocking up interest charges on their loan balance, as the repayment via self assessment won’t be knocked off the amount owed until the normal tax payment date of 31 January – a double whammy.
• HMRC are not allowed to use your tax credits award against an amount of tax you owe unless you specifically authorise them to do so. 

Help! I can’t pay…

If you are struggling to pay your tax, the important thing to remember is to contact HMRC as soon as possible to discuss your situation.  Ideally, contact them before the payment becomes due, as this gives you a better chance of them viewing your situation favourably, and allows them to suspend any late payment penalties from the time you come forward.

They might agree to let you have more time to pay, although you will still be charged interest on any amount not paid by the due date. The TaxAid website gives more information on negotiating time to pay with HMRC.  Useful contact numbers:

HMRC Business Payment Support Line
0845 302 1435

HMRC Time to Pay helpline for individuals
0845 366 1204

And what other changes are ahead?

From a future date (yet to be confirmed, but not before April 2011), HMRC plan to introduce ‘Managed Payment Plans’ which will allow taxpayers who so choose to settle their tax payments in instalments, subject to meeting certain requirements. 

Basically, you will be able to apply to HMRC to spread your tax payments across the due date – no interest will be charged on those payments made after the due date and no interest added on the amounts paid early. But the payment plan will have to be fairly balanced on either side. A simple example would be:

David files his 2010/11 tax return online on 31 July 2011.  His online calculation tells him he owes £1,200, which will be due for payment in full on 31 January 2012 (as he hasn’t made any payments on account for the year). David applies to HMRC to set up a Managed Payment Plan and they agree he can pay £100 a month from 31 August 2011 to 31 July 2012. So, by 31 January 2012, he has paid £600 in advance; he still owes the other £600 but this will be cleared in the next six months. 

We understand that David will be able to pay his instalments by direct debit or standing order.  Through a briefing to Opposition MPs, LITRG also secured an assurance in Parliament that although HMRC prefer direct debit, taxpayers should not be pressurised into setting one up if they would rather use a standing order. HMRC have also promised that paper filers will be able to use the managed payment plan system.

But what if David falls on hard times in, say, January 2012 and can’t keep up the payments? As with ordinary time to pay arrangements discussed above, David will need to go to HMRC to explain his difficulties as soon as possible. HMRC will have power to forego any penalties that might have otherwise been charged for late payment.

We will of course report again on the introduction of these new payment plans nearer the time. 

Useful links

More information is available from the Low Incomes Tax Reform Group website on various points raised in this article:

A further explanation of PAYE

More about being self-employed

Paying tax under Self Assessment, including Payments on Account. There is also a leaflet for student loan borrowers repaying via self assessment on the HMRC website.

Tax credits information