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Updated: 14 Jan 2021

A quarter of self-employed workers plan to delay their January 2021 tax payment

Tax bills worth £69.1m have already been delayed through the Time to Pay scheme

One in four people who complete tax returns are planning to delay their 2019-20 tax payment due by 31 January, according to a Which? Money survey.

The impact of coronavirus led the government to temporarily change the eligibility criteria for the Time to Pay arrangement, which allows you to spread the cost of your tax bill over 12 months.

HMRC's figures show almost 25,000 self-assessors have set up a Time to Pay arrangement since 1 October 2020, putting off paying tax bills worth £69.1m.

However, many could risk losing out on this vital support if they don't act soon. You can only apply for the scheme once you've filed your 2019-20 tax return - and millions are still outstanding.

Here, we explain how people are planning to manage their tax bills amid the pandemic and what you need to know about the help available if you think you might struggle.

What if you can't pay your tax bill in January?

COVID-19 is continuing to have a devastating impact on many people's finances, so it's no surprise that some may find it harder to pay their tax bill this year.

Which? surveyed 4,000 people in October 2020 and found one in five people who complete tax returns had already deferred July 2020's tax payment.

This option to defer the July payment on account was put into place by the government as part of its package of measures to help self-employed workers whose finances have been adversely affected by the coronavirus pandemic.

Two in five people who told us that they had deferred their July payment on account because they couldn't afford to pay the tax.

As the crisis continued more action was needed and the government temporarily altered the eligibility criteria for its Time to Pay arrangement as part of its Winter Economy Plan delivered in September.

For instance, the scheme only used to be an option for those who owed less than £10,000 in tax. Under the temporary coronavirus measures those who owe less than £30,000 are eligible.

When we asked the respondents who complete tax returns how they were planning to pay for the tax they owed for income earned during the 2019-20 tax year, one in seven hoped to use the Time to Pay arrangement. One in six said that they either didn't know or hadn't thought about it yet.

One in seven people said they would have to dip into their savings to pay their tax liability, while two in five said they had already budgeted for the expense.

How does the Time to Pay scheme work?

If you're accepted for the Time to Pay arrangement, you can split the tax payment into smaller instalments, which are spread over 12 months to January 2022.

However, this means that all tax owing from the 2019-20 tax year must be fully paid by 31 January 2022 (when the tax for 2020-21 will also be due) and you'll also still incur interest of 2.6% on any tax from 2019-20 that's outstanding after 31 January 2021.

To be eligible for Time to Pay, you must:

  • Owe less than £30,000 in tax
  • Be signed up to gov.uk and have a Government Gateway ID
  • Have filed your 2019-20 tax return and know how much tax you owe
  • Not have any other outstanding tax returns or owe other money to HMRC.

If you owe more than £30,000, or know that you'll likely need more than 12 months to pay the tax you owe, you might be able to arrange a different instalment plan. You can discuss your options with the Payment Support Service on 0300 200 3835.

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What happens if you pay your tax bill late?

If you fail to pay your tax bill by 31 January 2021 and you don't have an alternative payment arrangement in place, you stand to face some hefty fines.

These mount up over time. To start with, you'll be charged 2.6% interest from the date the payment was due.

After 30 days, a charge equal to 5% of the outstanding tax will be added to your bill.

After six months (31 July), another 5% charge will be added.

After 12 months (31 January the following year), an additional 5% charge will be added to your tax total.

If you're also late filing your tax return, you'll face a set of additional penalties.

What is payment on account?

After your first full year of business, self-employed people are often required to pay the tax they owe for the following tax year in advance - this is known as payment on account.

The tax you pay is based on what you paid for the previous tax year and the overall amount is split into two chunks.

The first is due on 31 January, the second is due by 31 July - and you may have to make another 'balancing payment' by 31 January the following year if it turns out you haven't paid enough.

Try the Which? tax calculator

If you haven't submitted your tax return yet, consider trying the Which? tax calculator.

This online tool is easy to use and totally jargon-free. You can tot up your tax bill and it will suggest expenses you might have forgotten.

Then, when you're ready, it can even submit your return directly to HMRC.

Watch our video below to see a quick guide on how it works.