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20 Dec 2021

Five ways to pay your 2020-21 tax bill - could you benefit by filing your tax return early?

Find out how to pay your tax bill on time and avoid a penalty from HMRC

While the deadline for online tax returns isn't until 31 January 2022, you'll need to submit your return by 30 December 2021 if you want more choice over how to pay your tax bill.

The tax you owe for money earned during 2020-21 doesn't have to be paid in a lump sum - but it's crucial to submit your return in plenty of time, or it could be too late to go for any alternative payment options.

For instance, you must submit your tax return by 30 December if you want the option to pay what you owe via your PAYE tax code.

Here, Which? explains five ways you can pay your tax bill, and what happens if your payment is late.

1. Pay in one lump sum by 31 January 2022

Many people opt to pay their self-assessment tax bill in one go. This is due by midnight on 31 January 2022 - but note that different payment methods may take longer to reach HMRC.

The tax you owe is based on the income you've declared in your tax return, balanced against your expenses and allowances.

You don't need to pay your tax bill at the same time you submit your tax return; submitting your tax return early can therefore give you much more time to organise your tax payment - whether you need to set up a budget to cover what you owe, or wait for funds to be transferred from other accounts.

For instance, as long as you had all of the required figures to hand, you could have submitted your tax return for 2020-21 as soon as the 2021-22 tax year began on 6 April. Doing this, you'd have around nine months to work out how best to pay the tax you owe by the end of the following January.

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2. Use one of these payment methods

Unless you choose to pay the tax you owe via PAYE (more on this in point three), you'll need to choose one of the following payment methods that are accepted by HMRC.

Some of them can take several working days to go through, so even if you've instructed the payment to be sent by the 31 January deadline you may still face a fine if it hasn't been received by HMRC in time.

What's more, as 31 January falls on a Monday this year, this means options like Bacs payments may need to be made as early as Wednesday 26 January to allow three working days for the payment to go through.

Same-day or next day:

  • online or telephone banking
  • Chaps
  • debit card online
  • in-branch at your bank or building society.

Three working days:

  • Bacs
  • direct debit (if you have already set this up with HMRC)
  • cheque through the post (this may take longer if Royal Mail services are experiencing delays).

Five working days:

  • direct debit if you haven't set one up with HMRC before.

Note that HMRC no longer accepts tax payments via personal credit card, and you can no longer pay at the Post Office.

Payments made with a business debit card will attract a fee, which will vary depending on your provider.

3. Pay through your PAYE tax code

If you pay tax via PAYE, but submit a self-assessment tax return to declare other forms of income, it may be possible to add the extra tax you owe to your tax code and pay throughout the following tax year.

This could be the case if, for instance, you're an employed worker but also receive income from other work you carry out on a self-employed basis.

To take advantage of this option, you must:

  • submit your online tax return by 30 December, or have already submitted a paper tax return by 31 October (the paper return deadline),
  • owe less than £3,000 in tax from your self-assessment return,
  • already pay tax through PAYE.

Many people find this option preferable, as it splits the tax they owe into much smaller chunks that are taken from your income before you receive it - rather than paying it in one go.

Of course, it does mean that your monthly income will be reduced, so you should make sure you're still able to cover essential costs before going for this payment option.

The extra tax you pay via PAYE will be incorporated into your tax code - it's important to check the tax code you're assigned to make sure you're paying the right amount.

4. Pay via payments on account

If you're self-employed, HMRC may ask you to pay an estimated amount of tax in advance, which is known as payments on account.

This involves making two payments - one by 31 January, and one by 31 July, where you pay half of the estimated tax bill that's due by the following 31 January.

In practice, this means you'll need to pay half the estimated tax you might owe for 2021-22 by 31 January 2022, and the other half by 31 July 2022.

Then, once you've submitted your 2021-22 tax return by 31 January 2023, you may have to make an additional balancing payment if the estimated bill didn't cover the amount of tax you owe, or you may get a refund if you've paid too much.

5. Use a Time to Pay arrangement

If you know you're going to struggle to pay the tax you owe by 31 January, you should contact HMRC as soon as possible.

You may be eligible to set up a self-serve Time to Pay arrangement if you:

  • have filed your 2020-21 tax return
  • owe less than £30,000 in tax
  • are within 60 days of the 31 January payment deadline
  • plan to pay off the tax within the next 12 months or less.

This arrangement allows you to spread the cost of your tax bill across smaller instalments, and was used by 123,000 taxpayers to pay their 2019-20 tax bill.

If your tax bill is more than £30,000, or you need the payments to be split over a longer period of time, you may be able to arrange a different instalment plan by calling the payment support service on 0300 200 3835. Make sure you have your National Insurance number and/or Unique Taxpayer Reference (UTR) number to hand.

What happens if you don't pay by 31 January?

If you haven't already paid, or set up an alternative arrangement, by midnight on 31 January 2022, then HMRC will be expecting your full tax payment.

Any payments that haven't been received by this time will begin to accrue interest charges - HMRC currently charges 2.6%, rising to 2.75% from 4 January 2022. The later the payment is, the more fines and interest will be accrued.

If your payment is more than 30 days late - that is, you don't pay your tax bill until the beginning of March 2022 - you could face additional penalties:

  • After 30 days: a charge equal to 5% of the outstanding tax
  • After six months (31 July): a further 5% charge
  • After 12 months (31 January 2023): an additional 5% charge.

If you also submit your tax return after the deadline, or HMRC doesn't think you've taken reasonable care to fill in your return correctly, you could face additional fines.

Use the Which? tax calculator to help with your tax return

If you haven't submitted your 2020-21 tax return yet, the Which? tax calculator could help.

The online tool is easy to use, jargon-free and can help tot up your tax bill - plus, it also suggests expenses and allowances you might have missed. Then, when you're ready, you can also submit your return directly to HMRC.

This article was updated on 20 December 2021 to add details of forthcoming changes to HMRC's late payment interest rate.