Could your 31 July self assessment payment on account be reduced?

Payments on account (POAs) are only required where the total income tax and Class 4 National Insurance contributions (if applicable) paid under self assessment for the previous year were either more than £1,000 or where less than 80% of the total tax owed for that year was deducted at source, i.e. through your tax code or already deducted at source from employment/pension income. 

Where payments on account are required, the payments are made in two equal instalments, payable by 31 January and 31 July. They are broadly calculated as 50% of the previous year’s income tax liability. If the POAs still don’t cover the total tax due for the year (2023/24 tax year) a balancing payment is payable by the ordinary due date of 31 January. If, however, the POAs exceed the total tax due for the year, there’s scope for the second POA to be reduced to match the 2023/24 tax liability or even reduced to nil.

Simple example where the 31 July POA can be reduced:

Say an individual owes £20,000 of income tax for the 2022/23 tax year, which is due for payment by 31 January 2024. As the total tax exceeds £1,000 and less than 80% of the tax due is deducted at source, POAs will also be due. The POAs will be £10,000 each, the first payable by 31 January 2024 and the second payable by 31 July 2024.

If the total tax payable for the 2023/24 tax year is, say, £15,000, the 31 January POA is deducted first (£10,000), leaving an amount payable of £5,000 before deducting the 31 July POA. The 31 July 2024 POA can therefore be reduced to £5,000 to cover this amount, as opposed to paying the full £10,000 and receiving a refund of £5,000 following submission of the tax return.

Is there scope to reduce the 31 July 2024 tax payment on account?

If a taxpayer anticipates their untaxed income for the following tax year is likely to decrease, or their tax reliefs are likely to increase, the level of the 31 July 2024 POA might not be appropriate and may lead to an overpayment of tax. In this scenario, the POA can be reduced.

Reducing the 31 July 2024 payment on account will help you with cashflow, as you won’t have to pay out as much in the first place and you won’t need to wait for HMRC to process an overpayment.

How to reduce the 31 July 2024 payment on account

Taxpayers have four months between the end of the tax year (5 April 2024) and 31 July 2024 to determine their tax liability and decide whether a claim to reduce the upcoming 31 July payment is appropriate.

If the income tax liability for 2023/24 is expected to be more than in the previous year, there’s no requirement or option to increase the 31 July payment on account; the excess tax payable will be considered when completing the 2023/24 tax return.

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 2025 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 2024, then interest may be charged. Furthermore, any repayments realised, because of filing your return nearer the 31 January 2025 filing deadline, will be held by HMRC to set off as a credit against your annual liability for 2023/24 or your first payment on account for 2024/25 (if applicable).

How we can help

Whether you’re already a client, are looking for an accountant, or are within the professional industry and need some advice, we can help you!

We undertake a review of the tax position of all of our clients with POAs to make sure that where there’s potential to reduce the 31 July POA, we do so.

We also submit your tax return well ahead of the 31 January deadline, so you can plan for any future tax payments you have well in advance.

For further information, please get in touch with your usual Larking Gowen contact, call 0330 024 088 or email enquiry@larking-gowen.co.uk.

Summer Dyball