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Getting to grips with your tax liability

Once your tax return has been submitted to HM Revenue & Customs (HMRC) you will be aware of how much you owe the tax man! But how do you then go about paying HMRC and when should you do this?

Payments on account are part of the Self-Assessment tax return process and were introduced to prevent individuals being in debt to HMRC.  Your tax bill is effectively split into two instalments paid during each year and can be considered as a way of paying off some of your tax bill in advance.

The first instalment is calculated by reviewing your previous year’s tax bill and is due by midnight on 31 January (the same day as your ‘balancing payment’, which clears your tax liability for the previous tax year where your income was higher than originally anticipated).  The second instalment falls due on or before midnight on 31 July.  Each instalment is usually 50% of your tax bill.

For example, imagine your annual tax bill for 2016/2017 was anticipated to be £6,000 (based on your 2015/2016 tax liability).  Once you have made both payments on account you will have paid a total of £6,000 by 31 July 2017.

However, when you actually submit your tax return, you discover that the total tax you owe for the 2016/17 tax year is significantly higher at £10,000.  You then need to pay what is known as a ‘balancing payment’ by 31 January 2018 which in this scenario would be £4,000.

Your 2018 payments would look as follows:

A total tax payment of £9,000 would fall due on 31 January 2018, made up of:

  • £4,000 balancing payment for your 2016/2017 tax bill
  • £5,000 for the first payment on account for 2017/2018 (worked out as 50% of your 2016/17 tax bill of £10,000)

There will then be a further £5,000 payment on account due on 31 July 2018 which is expected to meet your 2017/2018 tax bill, assuming there are no changes to your income.

The payment on account process can become problematic if you see fluctuating income from one year to the next.  For example, if you earn a lot of income in 2016/2017, but this significantly reduces in 2018 then you can request HMRC to reduce your payments on account.  You need to ensure that you don’t under estimate your income and reduce your payments on account too much as this may result in interest and/or penalties being applied for underpaying your tax.

HMRC payment methods

HMRC online services provides full details of the payments you are required to make in January and July.  You can pay by any of the following means:

Same or next day

Online or telephone banking

CHAPS

Debit card online

At your bank or building society

Within three working days

Bacs

Direct debit if this has been set up in advance with HMRC

By cheque using the postal service

Within five working days

Direct debit if this has not been set up in advance with HMRC

Following recent changes made by HMRC you can no longer make payments using the post office or a credit card.

Payments on account are not optional, but part of the Self-Assessment process.  Exceptions to the rules where you will not have to make two payments in the year only apply if:

  • You have already paid 80% or more of the total tax amount you owe by way of deductions throughout the year from your salary or pension.
  • Your Self-Assessment tax bill came in at £1,000 or less.

Errors within tax returns

HMRC may charge a penalty when a taxpayer fails to notify them of their tax liability or makes a careless or deliberate error within their tax return.  In such instances the penalty is calculated as a percentage of the potential lost income (PLR) using statutory bands for each type of taxpayer behaviour, and will vary depending on when the error was identified, be it voluntarily by the taxpayer or when prompted by HMRC.

Penalty as % of PLR Unprompted disclosure Prompted disclosure
Behaviour of taxpayer Maximum % Minimum % Maximum % Minimum %
Reasonable care taken 0 0 0 0
Careless 30 0 30 15
Deliberate but not concealed 70 20 70 35
Deliberate and concealed 100 30 100 50

The final penalty applied will depend on the quality of the disclosure, where HMRC deem ‘quality’ as having three elements:

  • telling 30%
  • helping 40%
  • giving access 30%

The percentages above are the maximum amounts that the penalty can be reduced by within the statutory range.

When determining the quality of the disclosure HMRC will look at the timing and view errors reported within 12 months as being a higher quality disclosure than if the error was reported a significant period after it occurred.  Where HMRC believe a significant period has elapsed before the error has been corrected or disclosed they may apply the maximum penalty.  A careless error reported after three years would carry a minimum 10% penalty where the minimum percentage for an undisclosed error rises to 25%.

HMRC guidelines are ambiguous and there are calls to clarify the exact nature of their policy and when penalties will be applied.

Never has it been more important to ensure your tax return is submitted in a timely and accurate manner and appointing a professional to do this ultimately reduces the risk to you.

There are many benefits of appointing a professional adviser and submitting your tax return information early.  It will allow you extra time to set money aside regularly in order to meet your tax liability payment deadlines, while providing additional time for planning and identifying efficiencies that may reduce your liability further.

For more information contact a member of our tax team.

Posted: January 23rd, 2018