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Payments on Account are one of the more confusing aspects of the Self Assessment system, and the income fluctuations from Coronavirus over recent months will only make this worse. Lets try and pick this apart.

Payments on Account apply to all Self Assessment cases, so this could be:

  • Sole Traders and Business partners in respect of business profits
  • Company Directors in respect of salaries and dividends
  • Landlords in respect of rents

 

Self Assessment Time Line – 2019-20 and 2020-21

Lets start with looking at a normal time line:

31 January 2020 You paid your final 2018-19 tax bill and, if due, a 50% payment on account for 2019-20 (based on 2018-19 total)
31 July 2020 You paid, if due, a second 50% payment on account for 2019-20 (based on 2018-19 total).

(Government gave the option of a deferral of this amount to 31 January 2021, so you possibly didn’t pay it in July)

31 January 2021 Submit your 2019-20 return based on income and profits to 5 April 2020

Pay final 2019-20 liability, less the payments on account from January and July 2020 (if made)

If due, pay a 50% payment on account for 2020-21 (based on 2019-20 total)

31 July 2021 If due, pay a second 50% payment on account for 2020-21 (based on 2019-20 total)
31 January 2022 Submit your 2020-21 return based on income and profits to 5 April 2021

Pay final 2020-21 liability, less the payments on account from January and July 2021 (if made)

If due, pay a 50% payment on account for 2021-22 (based on 2020-21 total)

31 July 2022 If due, pay a second 50% payment on account for 2021-22 (based on 2020-21 total)

 

The Basics of Payments on Account

The normal due date for liabilities from a Self Assessment return is 31 January after the tax year, the same as the deadline for submitting the return:

  • EG for 2019-20
    • You report income and business profits up to 5 April 2020 on a 2019-20 return
    • Submit return by 31 January 2021.
    • The tax is due 31 January 2021

The effect of this is, assuming you report on a tax year basis, you are paying tax between 22 and 10 months after its been earned – at 31 January 2021 you are paying tax on income earned between 6 April 2019 and 5 April 2020.

HM Government don’t like giving extended credit, so Payments on Account are a way of bringing taxes forward.

For any given Self Assessment period, if the amount due is over £1,000 then Payments on Account are due based on the previous years tax liability – this accelerates the payments by 12 months.

  • EG for 2019-20
    • If your 2018-19 Tax Liability was over £1,000
    • You pay 50% of the 2018-19 figure on 31 January 2020 toward 2019-20 (at which stage you are 10 months through 2019-20)
    • You pay a further 50% of the 2018-19 figure on 31 July 2020 toward 2019-20 (at which stage you are 4 months after the end of 2019-20)
    • The two payments on account are offset against the 2019-20 amount otherwise due on 31 January 2021
    • On 31 January 2021 your payment will be
      • Total for 2019-20
      • Less 2019-20 Payments on Account from January and July 2020
      • Add Payment on Account for 2020-21 if over £1,000

This takes a bit of following, especially if you don’t have a financial mind.

Lets look at an example with some figures:

Example 1 – Maria
31 January 2019 Maria submits her 2017-18 tax return. The tax due is £800. This is her first return, so she had made no payments on account.

As the tax due is below £1,000 no Payments on Account are due

31 January 2020 Maria submits her 2018-19 return. The tax due is £1,200.

She pays £1,800 being £1,200 for 2018-19 and a 50% payment on account for 2019-20 of £600

31 July 2020 Maria pays a second 50% payment on account for 2019-20 of £600
31 January 2021 Maria submits her 2019-20 return. The tax due is £1,800. She pays £1,500 which is
– £1,800 final 2019-20 liability less £1,200 paid on account = £600
– £900 first payment on account for 2020-21
31 July 2021 Maria pays a second 50% payment on account for 2020-21 of £900
31 January 2022 Maria submits her 2020-21 return. The tax due is £1,400. She pays £300 which is
– £1,400 final 2020-21 liability less £1,800 paid on account = £400 credit
– £700 first payment on account for 2021-22
31 July 2022 Maria pays a second 50% payment on account for 2021-22 of £700
31 January 2023 Maria submits her 2021-22 return. The tax due is £2,400. She pays £2,200 which is
– £2,400 final 2021-22 liability less £1,400 paid on account = £1,000
– £1,200 first payment on account for 2022-23
31 July 2023 Maria pays a second 50% payment on account for 2022-23 of £1,200

 

There are a few anomalies to be aware of around Payments on Account.

First, although the basic rule is that Payments on Account are due for next year if your tax liability is over £1,000, if you paid more than 80% of your tax at source, then Payments on Account do not need to be made – this mostly effects people who have a mixture of Employment and Self Employment. Eg:

  • If your total 2018-19 tax liability is £6,000 and you paid £5,000 at source leaving £1,000 due in January 2020 – then 2019-20 Payments on Account are not due, as the Self Assessment amount is less than 20% of the total.
  • If your total 2018-19 tax liability is £4,000 and you paid £3,000 at source leaving £1,000 due in January 2020 – then 2019-20 Payments on Account are due, as the Self Assessment amount is more than 20% of the total.
  • If there were no tax amounts paid at source, then this test does not apply.

Secondly, if you know your tax liability for next year will be less, you can apply to reduce your Payments on Account. Eg:

  • Taking the example of Maria above, when she submits her 2019-20 return in January 21, if she knows 2020-21 will be lower, she could reduce the 2020-21 Payments on Account to match the estimated 2020-21 tax bill – bearing in mind she is 10 months through that year, so she probably has a good handle on her businesses performance.
  • This would mean she pays less in January and July 2021, but more in January 2022
  • Overall the aggregate amount she pays will not change, but it helps her cash flow.

You apply to reduce Payments on Account by:

  • sending in a SA303 form or
  • go into your online account with HMRC and there should be an option “reduce payments on account”

Finally, if you know next years tax will be higher you don’t need to do anything, except prepare for it. Specifically there is no mechanism or requirement to increase Payments on Account.

A couple of questions we routinely get from clients:

  • Why are HMRC asking me to pay in advance? They are not, they are merely asking you to pay earlier than the normal deferred Self Assessment date. Your first payment on account will always be in 31 January of a given tax year, which is 10 months into that tax year so you should have earned 10/12ths of your income.
  • Why did you estimate this amount – I don’t think I will earn that much? There are no estimates involved – its a set process of 50% of the previous years tax liability, albeit with a option to reduce the amount if you know your tax for next year will be lower.

 

 

Cornonavirus Impact on Payments on Account

The above analysis has set out the quite complex and detailed basis to the Payment on Account regime.

Coronavirus layers an additional complexity over this. Factors to think about:

  • Most of the Coronavirus disruption occurs in the 2020-21 tax year, not 2019-20. Only a few weeks, say mid March onward, of 2019-20 was affected. This means that the 2019-20 final payment due in January 2021 will reflect a whole years normal profits before the downturn from Coronavirus.
  • If you postponed the second Payment on Account for 2019-20 in July 2020, then this is going to catch up with you in January 2021 – because, as explained in the last paragraph, 2019-20 tax liabilities largely aren’t affected by Coronavirus.
  • The Coronavirus has largely affected the 2020-21 tax year. Your profits may be significantly reduced for 2020-21, in which case come January 2021 it will make sense to reduce the 2020-21 Payments on Account due in January and July 2021.
  • Remember, Grants under the Self Employment Income Support Scheme, or the various premises linked grants based on Rateable Value, count as taxable income. So any loss of profits from Coronavirus disruption may be offset by these grants. Conversely Bounce Back Loans are not taxable.
  • For some people, as the grants were a fixed amount, they may find their 2020-21 profits are actually higher than normal if their businesses were only marginally affected by Coronavirus but they qualified for fixed grants. In which case this will catch up with you in January 2022 with higher tax payments becoming due then.

A practical strategy:

  • If your 2019-20 taxes aren’t done yet, get them done now – don’t leave them till January. This will give you visibility on the 2019-20 liabilities, and the amounts due in January 2021.
  • Get a rough idea on how 2020-21 to date is looking, bearing in mind (a) any downturn in profits from Coronavirus and (b) any Grant income.
    • If the aggregate is about the same as 2019-20 then you don’t need to do anything, but be aware your tax bills won’t fluctuate much so you need to think about this in cash flow terms.
    • If the aggregate is less than 2019-20 then be aware that whilst the final payment for 2019-20 in January 2021 won’t change, you may want to reduce your Payments on Account for 2020-21. If you are a Whitefield / YogaTax client, then we can take care of this for you.
    • If the aggregate is more than 2019-20 then this is going to catch up with you in January 2022.