Self Assessment payments on account: what has changed
27 July 2020
Posted by: LITRG
Published on 9 July 2020 by The Low Incomes Tax Reform Group
If you complete a Self Assessment tax return then you may be required to make ‘payments on account’ (advance payments towards your tax liability for the year). However, the government have stated that you can defer your second payment on account for 2019/20, normally due 31 July 2020, if you are in financial difficulties because of the coronavirus.
What are payments on account?
Payments on account are advance payments towards your tax liability for the year if you complete a Self Assessment tax return. Not everyone who completes a Self Assessment tax return is liable to make payments on account.
Payments on account for the 2019/20 tax year are normally due on 31 January 2020 and 31 July 2020. They are calculated based on the amount of income tax (and Class 4 National Insurance contributions) which you owe as a balancing payment to HMRC for the previous tax year. However, you can request to reduce these payments if you expect to pay less tax for the 2019/20 tax year.
You are only liable to make payments on account if your balancing payment (that is, your total tax liability less amounts deducted at source such as Pay As You Earn (PAYE)) is at least £1,000 and represents at least 20% of your total tax liability.
For more information, we suggest you review Self Assessment: understanding the basics and our factsheet on payments on account. See also How do I pay tax on self-employed income?.
What has the government announced?
If you are liable to payments on account for 2019/20, the second of these would normally be due on 31 July 2020. However, the government has announced that if you are ‘finding it difficult’ to make your second payment on account by 31 July 2020 due to the impact of coronavirus, you can defer paying it until 31 January 2021.
The effect of this measure is that HMRC will not charge interest or penalties on any amount of the second payment on account which is deferred, provided it is paid on or before 31 January 2021.
You do not need to do anything to tell HMRC that you wish to defer the payment of your second payment on account. If you have a direct debit in place and you wish to defer it, then you must cancel the direct debit with your bank – but don’t forget to set up a new one for January 2021.
You should be aware that if you choose to delay paying the second payment on account then you will have to pay all of the following on or before 31 January 2021:
- Your second payment on account for 2019/20
- Your balancing payment for 2019/20 (if applicable)
- Your first payment on account for 2020/21 (if applicable)
Josh is a self-employed carpenter. His self-employed profits for 2018/19 were £18,000 and he has no other taxable income for the year. His total income tax liability for 2018/19 was £1,230 and he is liable to make payments on account towards his liability for 2019/20 of £615 each – normally due on 31 January 2020 and 31 July 2020. Note: for simplicity, we have ignored Class 4 National Insurance.
On 31 January 2020, he pays his balancing payment for 2018/19 plus his first payment on account for 2019/20: a total of £1,845.
He loses work as a result of the coronavirus pandemic and struggles to meet his monthly outgoings. He makes a claim for a taxable grant under the Self-Employment Income Support Scheme, but he uses this to meet outstanding liabilities and does not have any money left to pay the second payment on account of £615 which is normally due on 31 July 2020.
Josh decides to defer the payment of the second payment on account. He doesn’t need to notify HMRC.
Meanwhile he completes his tax return for 2019/20, which shows slightly improved taxable profits of £20,000. His tax liability for the year is £1,500. By 31 January 2021, he must pay:
| Deferred second payment on account for 2019/20||£615|
| Balancing payment for 2019/20 (£1,500 less payments on account totalling £1,230)|| £270|
| First payment on account for 2020/21 (50% of £1,500)||£750|
| Total due by January 2021||£1,635|
Can I still pay the second payment on account if I want to?
However, if you make the second payment on account by 31 July 2020 and you are due a refund when you file your 2019/20 tax return, you would normally be due a repayment supplement (interest) based on the original due dates (or payment dates if later). It is not clear whether this interest will be calculated based on the 31 July 2020 date or the 31 January 2021 date.
I am not in financial difficulty – can I still defer?
Operationally, the due date for all taxpayers’ 31 July 2020 payments on account is deferred by six months automatically – regardless of their individual circumstances. However, HMRC guidance on deferring the second payment on account is directed towards only those who are in financial difficulty as a result of the impact of coronavirus (COVID-19).
Although we do not anticipate that taxpayers will be required to demonstrate that they are in financial difficulty in order to benefit from the measure, the government are encouraging individuals who are in a position to do so to make the second payment on account by the normal due date (31 July 2020).
Can I reduce my payments on account instead of – or as well as – deferring the second payment on account?
Yes. You may consider doing this if you expect your taxable profits in 2019/20 to be lower than they were in 2018/19. See here for more information on reducing your payments on account. We also explain using an example here.
Depending on the extent of the reduction, you may be able to get a refund of part or all of the first payment on account which was due by 31 January 2020.
However, if you reduce payments on account ‘excessively’ (that is, such that the reduced payments on account are not enough to cover your income tax and Class 4 National Insurance contributions liability for 2019/20) then interest will be payable. This will be calculated based on the amount of the shortfall. Penalties may also be applicable.
Given that the 2019/20 tax year has now finished, you may be in a position to calculate your final tax liability for the year so you can ensure that any reduction on your payments on account is not excessive. If you actually submit your 2019/20 tax return to HMRC, you will not need to make a separate claim to reduce your payments on account – if appropriate, they should be reduced automatically.
Where can I find more information?
For further information on the deferral of payments on account, see GOV.UK.
If you are struggling to pay your tax, you may wish to set up a Time to Pay arrangement with HMRC. We understand that HMRC are currently taking a sympathetic approach to taxpayers wishing to arrange such payment plans. If you owe less than £10,000, you should be able to set one up online without needing to speak to HMRC.