Many taxpayers must make payments on account towards their income tax, with a significant instalment typically falling due in January alongside any balancing payment for the prior tax year.
These taxpayers want practical steps to estimate and budget for the January outlay, understand the statutory deadlines, avoid common pitfalls such as interest and penalties, and know when and how to reduce payments on account if the current year’s income is lower than the previous year.
General principles of self assessment, payments and timing.
1. Self assessment duties:
The UK operates a system of self-assessment, which means that each individual is responsible for assessing (i.e. calculating and paying) their own tax liabilities.
2. Direct payments are often made in advance:
Under self-assessment, direct payments of tax are usually made in advance of the computation being prepared.
3. The formal due date in January:
Its inclusion in the PAYE code means that tax is paid earlier than the formal due date (which is 31 January following the tax year).
Estimating and budgeting for the January payment
Work from the total tax due position – this means the tax due after deducting tax already suffered, usually at source. (i.e. PAYE).
If accounts have not been finalised when your tax becomes due, pay your tax based on estimates but understand the interest risk. Interest will be charged from the original due date of payment should it turn out that tax was underpaid.
Reducing or adjusting payments on account if this year is lower
A taxpayer may wish to reduce their payments on account.
The consequence if you reduce your payments too far means that if the amount paid subsequently proves to be insufficient, special rules apply … If the payments made on account are lower than this, interest will be charged on the difference, from the due date for the payment on account until the day before the tax was paid
PAYE coding interactions that affect January cash flow
A small income tax liability may be collected under PAYE via a coding adjustment.
Whenever non-PAYE income is coded out for the first time, the payments on account due under self-assessment will still be based on the previous year’s tax liability … and so the taxpayer will overpay tax unless they claim to reduce these payments.
A taxpayer has the right to request the removal of their non-PAYE income from the code … however, the taxpayer would then be obliged to complete tax returns in order to report this income.
Common pitfalls and how to avoid them
Interest will be charged from the original due date of payment should it turn out that tax was underpaid.
Penalties for late payment of tax are in addition to any interest charge arising from the late payment … Where a taxpayer enters into a Time to Pay arrangement … any late payment penalties that would otherwise become due … will be suspended, provided that the taxpayer meets the terms of the agreement.
Summary table of key points
|
Topic |
Key point |
Supporting extract. |
|---|---|---|
|
System |
Self-assessment duties |
The UK operates a system of self-assessment. |
|
Structure |
Two installements |
From 31st January 20XX, From 31st July 20XX. |
|
January due date |
Formal due date |
31st January following the tax year. |
|
Estimation |
Pay on estimates; interest risk |
Pay on the basis of estimated figures. Interest will be charged. |
|
Reduction |
Claim to reduce POA |
Unless they claim to reduce these payments. |
|
Safeguard |
Interest if reduced too far |
Interest will be charged on the difference. |
|
Coding |
Small liabilities via PAYE |
Collected under PAYE via a coding adjustment. |
|
Hardship |
Time to Pay suspends penalties |
Penalties ... will be suspended |
Conclusion
For taxpayers planning for January, the starting point is that you, not HMRC, must calculate and pay what is due, with 31 January being the key formal due date; plan cash flow accordingly
Build a forecast of your “tax due” by reconciling total income tax and Class 4 NIC against tax already suffered, and remember that direct payments often precede the final computation.
If your current year profits or rents are materially lower than last year, consider a prompt claim to reduce the January payment on account, but monitor the position and top up if needed to avoid interest on any shortfall.
If you face short term cash constraints, engage HMRC early to agree a Time to Pay arrangement so that penalties are suspended while you keep to the plan, noting that interest can still accrue.
If you need any tax advice in Milton Keynes give a call to the team at Holmes Accountancy on 01908 315716 or contact us here.
The tax tip is provided for general guidance only; further advice should be sought, for specific issues.
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