Should you take advantage of this year's delayed payment on account deadline?

As part of the government's coronavirus help for those who pay tax by self-assessment, this year's July payment on account deadline has been deferred to 31 January 2021.

While this measure was initially brought in for self-employed workers, it counts for anyone who pays their tax through payment on account, including those who receive a rental income.

A recent survey of more than 6,500 self-employed people found that more than half are planning to defer their payment - that's according to Go Simple Tax, which we've teamed up with for the Which? tax calculator.

Here, we explain the pros and cons of deferring July's payment on account, along with other options for self-employed workers whose income has been affected by the coronavirus outbreak.

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What happens if you defer July's payment on account?

This year's payment on account, which would usually be due by 31 July, is being automatically deferred for taxpayers who usually pay their bill in this way.

Instead, the tax you would have paid will instead be due by 31 January 2021.

The assumption is that people will have more time to prepare and save to pay their tax bill, and hopefully any coronavirus-related falls in income will have been smoothed out by then - but that may not be the case for everyone.

Deferring July's payment presents a number of other issues that you should weigh up.

Firstly, the amount of tax due by the end of January 2021 is likely to be much more than usual. You'll have to cover the deferred payment on account for July, possibly a balancing payment if it turns out you owe more tax for 2019-20 than you've already paid, as well as your first payment on account instalment for the 2020-21 tax year.

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What happens if you pay July's payment on account?

If you're able to make this month's payment on account, and want to, you can choose to do this in the usual way.

It should be treated as a voluntary payment, and HMRC should credit the funds to your self-assessment record, where it will be set against your confirmed tax bill after you've submitted your 2019-20 tax return.

Should you request a payment on account reduction?

If you think your profits for 2019-20 are less than 2018-19 (which is what this year's payment on account figures are based on), you can apply for these tax bills to be reduced.

You can either print and fill out form SA303 and send it to your local tax office, or login to your personal tax account online, and visit the 'reduce payments on account' section.

You don't need to provide any proof that your tax bill will be lower than the previous year, but you shouldn't make it unrealistically low. If it turns out that you owe much more tax after having your payment on account bill lowered, HMRC may charge you interest on the difference owed.

The benefits of filing your tax return early

Whether you decide to make July's payment on account or not, you could benefit from submitting your 2019-20 tax return sooner rather than later.

Filing your tax return early has several advantages, including:

• You'll know exactly how much tax you'll need to pay: if you defer July's payment on account, you'll need to sort out a budgeting plan to pay your tax bill at the end of January next year. By submitting your tax return, you'll know well ahead of time whether you're owed a refund, or how much your balancing payment will be, making your planning much easier.
• If you're owed a tax refund, you'll get it sooner: if you've already paid too much tax and are due a refund, HMRC will process this as soon as it receives your tax return - so, the earlier you file, the earlier you'll get the money back.
• You'll avoid late fines: even if your income hasn't been affected by COVID-19, chances are you could do without added fines and charges to your tax bill. Submitting your return early at least makes sure you won't be subject to a late filing penalty.

You can tot up your tax bill and file your return online with the Which? tax calculator.

Options if you're struggling to pay your tax bill

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

You may be able to make a 'payment proposal', where you can suggest alternative ways to pay your bill - this could be through monthly or quarterly instalments, for example.

HMRC will consider the proposal, but may ask for details of other assets you hold (such as savings or investments) before accepting the offer.

What is payment on account?

Many people who pay tax by self-assessment make payments on account. This spreads your tax payments across the year and sees you paying in advance of submitting your tax return.

So, for the 2019-20 tax year, which ended on 5 April 2020, those who pay tax by payment on account will have already made the first instalment towards their tax bill on 31 January 2020.

The second instalment is usually due on 31 July, and then the following 31 January is when you'll either make a 'balancing payment' if you haven't paid enough tax, or you'll get a tax refund if you've paid too much.

What you owe for payment on account is based on the amount of tax you paid in the previous tax year; if your profits have reduced since last year then it's likely you'll get a refund; if you've made more money then you'll have to make a larger balancing payment.

• Find out more:how to file a self-employed tax return