Payment on account deadline looms

Monday 29 July 2013

Contractors who pay tax via a Self Assessment return are being reminded to make their next payment on account before Wednesday’s deadline (July 31st).

Self-employed professionals have just two days left to settle their tax bill for the year ending April 5th this year to avoid paying any interest on their debt to HMRC.

Because self-assessors cannot have their taxes deducted at source as traditional employees, they are expected to pay an estimate of their annual tax bill throughout the year. The first payment on account was due on January 31st, but the final instalment is due this week and contractors who forget to pay what they owe could face further costs down the line.

These payments usually need to be made if the tax owed in the previous year was more than £1,000. However, contractors will be exempt if more than 80 per cent of their liability had already been deducted at source.

The payments only apply to income tax, since capital gains tax payments will not be due until the end of January next year.

Once a payment is 30 days late, HMRC charges the taxpayer a penalty of five per cent of the total tax owed. Penalties mount up from there, so that after six months another charge of five per cent is levied on top of the existing balance and after a year, an extra five per cent will be piled on top. With interest on the full amount building at the same time, contractors who neglect to keep up with their payments could potentially face hefty tax bills in the future.

HMRC sends out reminder letters complete with payslips in late June and early July. But as tax consultant Annette Morley told This Is Money, contractors will be expected to pay regardless of whether they have received these documents.

When their Self Assessment return is received, the exact figure is then calculated and taxpayers receive either a bill for the balance or a rebate. However since the deadline for paper Self Assessment returns is October 31st, and online returns are not due until January next year, the process could take several months. Speaking to This Is Money Mike Warburton, tax partner at Grant Thornton, suggested that contractors should consider submitting their tax returns sooner rather than later to make sure they receive any rebate as quickly as possible.

Since each year’s estimate is based on the previous year’s figures, this could also be the best way to make sure that the figure for next year’s payments on account is as accurate as possible.

But for contractors, who often find that their income fluctuates from year to year, this can mean paying too much tax in some years. Rather than waiting months for a rebate, self-employed workers can ask the taxman to reduce its monthly payments. Nevertheless, this can be a risky strategy - if they earn more than expected and end up owing more, HMRC will still charge interest.

If the tax owed is too high because of a mistake on the Self Assessment form, contractors will need to correct their paperwork and submit the amended return within one year of HMRC receiving the original.

In the worst case scenario, if contractors find themselves struggling to make the payment, they have the option of contacting HMRC and negotiating payments in instalments.

By Victoria McDonnell

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