Many taxpayers who receive income gross (without the deduction of tax) are required to make payments on account towards their following year tax liabilities e.g. self-employed individuals. Two payments are required each year, due by 31 January and 31 July.
Income can often vary dramatically each year and therefore if you are expecting your income to fall in the following tax year, then you may wish to consider making a claim to reduce the payments on account due to ensure you do not overpay.
However, if you reduce payments on account by too much then HMRC will charge late payment interest. The interest rate is tied to the Bank of England’s base rate (which has been increasing over the past 12 months to tackle inflation).
HMRC’s late payment interest rate is currently 6.5% per annum, which is higher than the interest due on many current mortgages deals. It is therefore advisable that if you wish to reduce your payments on account, that it’s worth including a buffer to ensure they do not underpay and are required to pay late payment interest.
It is also worth noting, that if you do not reduce your payments on account and income is lower in the following tax year, then HMRC will issue repayment supplement at a rate of 3% per annum, which is competitive when looking at the current rates on offer by major UK banks.
What if I have over-reduced my payments on account?
If when you come to prepare your tax return for the year and you have reduced the payments on account by too much, it still may be possible to minimise the impact of late payment interest payable.
You can minimise the underpayments by carrying back tax reliefs such as the additional tax relief due on charitable donations by higher rate taxpayers, the 30% income tax reducer available on investments made under the Enterprise Investment Scheme or by losses arising on subscriptions in unquoted trading companies.
If you would like to discuss specific circumstances, please get in touch.