Self Assessment tax returns are very important, but can be complicated and, let's face it, a tad boring. For newbies to the tax return process, understanding the return process is one thing but being introduced to payments on account, that are supposed to ease the burden, often end up causing even more confusion.
Because Coronavirus has hit the self employed community hard, HMRC are allowing taxpayers to defer their second payment on account that's usually due on the 31st of July 2020 to January 31st 2021. This is very helpful if you are strapped for cash at the moment, but we'd recommend speaking to an accountant before making the decision.
We've asked tax expert Mike Parkes from GoSimpleTax to break down all your burning questions about deferring your payment on account, to help make the best decision for you.
So, what is a payment on account Mike?
Payments on account are payments made towards your next tax bill, before your tax bill is due. They're calculated based on the amount that you paid the previous year.
When does a payment on account need to be paid?
So HMRC works out the amount by splitting the amount you paid in your last tax year into two, and places the deadline for the payments six months apart from one another.
For example, if you had a £5000 tax bill for 2018/19, you'd pay £2,500 on the 31st January 2020, and another £2,500 on the 31st July 2020 (but this second one has now been deferred).
Shall I defer the second payment on account, or just pay it now?
Well, this is entirely up to you and totally depends on your financial situation right now. You have two different options:
1. Pay the original July deadline, if you've got the money to:
If you're in a finically stable position and have not been affected by COVID-19 much, then you should consider paying the tax bill in July. This is because clearing debt where possible is sustainable and means January 2021 can mark the start of a new financial year with no overhanging tax.
2. Defer the payment and pay in January 2021, if you cannot afford to pay right now:
Of course, if paying your second payment on account seems unmanageable right now, then go ahead and defer. Just please remember that you'll have to make up any reductions next year in January as the deferral is not a grant, and a potential £5000 in January can be a lot harder to pay than £2500 now!
How can I defer paying until 31st of January?
If you want to defer, you don't need to tell HMRC that you're deferring your payment on account. And remember, if you do defer it doesn't stop you from being eligible for any other coronavirus support packages, so don't be afraid to defer if necessary!
How can I pay the payment on account in July as usual?
Go ahead and use the government online service here. You can make your payments in instalments as well at any time in between now and 31st January 2021 by setting up a budget payment plan to spread the cost of the bill. This is another great way of dealing with lower income because of Coronavirus, but still getting on top of your tax bill before January.
What if I'm still unsure about what the best thing to do is?
It can be unsettling not knowing what to do, but there is a lot of help out there. It might be a good idea to reassess your situation and calculate how much your total tax bill is for next year to see if you'll be able to pay it, or get some advice. At GoSimpleTax, they can help you decide whether deferring your payment is beneficial, depending on your current situation, income and expense. Our software will highlight areas where you can reduce your tax bill. Check out their 14 day free trial, and then you can always upgrade later! And, as a customer of Penfold, you'll get a 15% discount off, just click the link!