Can your second tax payment on account be reduced?

With the next key date in the self-assessment calendar approaching, a second payment on account maybe due by 31 July 2022 to settle your income tax liability before the 2021/22 payment deadline.

What is a payment on account?

Where you have a balancing tax liability for a year of £1,000 or more, and less than 80% of your total tax for that year has been taken at source (through PAYE etc.), you’ll need to make payments on account in advance of the next tax year.

For example:  

Mr Savvy had a total tax liability of £10,000 for the 2020/21 tax year, of which £6,500 was taken at source through PAYE; via self-assessment, he had a balancing liability of £3,500 to pay to HMRC. In this instance, he has a balancing liability of more than £1,000 and only 65% of this total liability for the year was taken at source. This means Mr Savvy is liable to make payments on account in advance of the 2021/22 tax year, as follows:

When Mr Savvy comes to complete his 2021/22 return, he’ll have paid £3,500 by 31 July 2022 towards his annual liability which will be due for payment by 31 January 2023.

Any over or under payments are repaid or settled once the return has been submitted.

In light of the above, it can be advantageous to file your tax return ahead of the 31 July payment deadline and assess whether or not your payment on account has been overestimated.

Could your 31 July 2022 payment on account be reduced

By filing your 2021/22 tax return early, you can accurately determine if it’s possible to reduce your 31 July payment on account, as well as having the ability to expediate any tax repayments. Also, by filing your tax return early, you have clarity over your tax position and can begin cashflow management to settle the upcoming 31 January 2023 liability in good time.

As you’ll note from the example above, the payment on account due for settlement by 31 July 2022 has been calculated based on your tax position for the 2020/21 tax year. However, your tax position can vary on an annual basis for a variety of reasons, such as a decrease in profits, tax investment schemes, capital losses being offset against general income etc; again highlighting the benefit of filing your tax return early.

Capital Gains tax

Please remember that Capital Gains tax is ignored when calculating payments on account, therefore any chargeable events won’t affect your liability and will instead be payable as part of the January 2023 liability only 

Submitting your tax return close to the filing deadline

If you don’t file your return early, then the July payment on account will need to be settled per prior guidance. This could result in a possible delay in HMRC issuing any repayment, which can be up to 6-8 weeks. If you settle your payment on account after 31 July 2022, then interest may be charged. Furthermore, any repayments realised, as a result of filing your return nearer the 31 January 2023 filing deadline, will be held by HMRC to set off as a credit against your annual liability for 2021/22 or your first payment on account for 2022/23 (if applicable).

Need help?

In summary, don’t delay and contact us at your earliest opportunity! We may be able to help reduce your second payment on account, or at least help manage your cashflow between upcoming tax payments. Do get in touch with your Larking Gowen advisor as soon as possible, who would be happy to assist.

You can find contact details on the Our People section of the Larking Gowen website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Bridie Iachetta  Edward Cotton