With the tax return deadline just two weeks away, the Which? Money experts are answering your self-assessment queries. You can submit your questions to email@example.com, or via our Facebook or Twitter pages.
Q: I’m retired but do occasional consultancy work. This year, I’m having to pay instalments of tax in advance. It’s about £2,000 every three months. Next year I’ll be doing a lot less consultancy work, so how do I get the instalments reduced?
Submitted via Which? Money Magazine.
A: If you’re self-employed, or have income from lots of different sources, HMRC may ask you to pay your tax and National Insurance in instalments – known as ‘payment on account.’
But if your circumstances change, you may find yourself paying too much. Which? explains how payment on account works and how you can adjust your payments.
Who pays tax by payment on account?
With payment on account, you pay your tax by instalments twice a year – the first by midnight on 31 January, and the second on 31 July.
Payment on account will usually apply to self-employed people with irregular incomes, or incomes from different sources.
But not everyone who is self-employed will need to pay in this way. If you owe £1,000 or less, or if more than 80% of your tax bill was paid via PAYE, you won’t have to make payments on account – you can just make a single payment by 31 January.
- Find out more: Paying tax: self-employed
How is the payment calculated?
As a general rule, HMRC will ask you to pay half the previous year’s tax bill in each instalment.
You may also need to pay Class 4 National Insurance Contributions, which will be included in your bill.
As an example, let’s say HMRC asks you to pay £20,000 for the 2017/2018 tax year – which begins on April 1 2017. You’d need to pay your first instalment of £10,000 by 31 January 2018 and your second instalment of £10,000 on 31 July 2018.
What is a balancing payment?
If you earn more taxable income than what is covered by your two payments, the remaining amount will be calculated as a balancing payment, which is due by midnight 31 January the following year.
So, on 31 January 2018, in addition to your first payment for the 2017-2018 tax year, you’d also need to pay any outstanding tax from 2016-2017.
If you overpay your tax, HMRC will send a refund. If you underpay, you’ll be charged interest on what you still owe.
Can I lower my payment on account instalments?
The amount you pay is based on your previous year’s earnings, but it’s common for self-employed workers to have fluctuating incomes. So, if you think your tax bill will be lower in the next tax year than the last one, you can apply to HMRC to have your payment on account reduced.
If you file a tax return online, you can log in to your HMRC account and click ‘payments on account’. Alternatively, you can fill out form SA303.
You’ll need to state the amount you intend to pay and the reasons why you think you’ll owe less.
It’s important to think about this carefully. If you reduce your bill just to manage cash flow, you might face a much larger bill later on.
You can also call HMRC on 0845 366 1204 to discuss setting up a new payment arrangement.
How much tax do I owe?
If you’re self-employed, it’s important to work out how much tax you’re likely to pay, taking into account all deductions.