Payment on Account

[Freaki Li Cuatre]

I've made a bit of a schoolboy error.

This last tax year I paid myself a rather large dividend - needs must and all that - which took me way into the higher tax band. I stashed the tax money that would be due on 31 Jan.

Just had my self assessment done & I've also been told that not only will I have to cough up the tax I've allowed for but also a payment on account (half the sum of the owed tax).

That is also due at the same time. I knew about payment on account but I didn't realise I was having to cough up so soon.

Problem is, to make the payment on account, I'm going to have to pay myself another dividend which will almost certainly push me into the higher tax band for this year (without the payment on account, I'd probably have at least kept below the threshold at which payments on account kick in).

Apparently I can apply to reduce the payment on account - but is there a penalty if I earn more than the amount my payments on account cover?

In fact, thinking about this, it really pisses me off. Suppose one year I earn a stack, go into the higher tax band and then have to pay on account the next year. But, the next year, I'm IR35 caught & I'm paying PAYE - so the payments on account are effectively loans to HMRC (as well as giving them a shed load of cash on account PLUS what I'm paying in PAYE)?

And this year I'm going to get myself in theupper tax band just to make the damn payment. Seems like a vicious circle

[TheFaQQer]

Apparently I can apply to reduce the payment on account - but is there a penalty if I earn more than the amount my payments on account cover?

If you reduce it and you owe more, then you pay interest on the amount you didn't pay.

If you don't reduce it and then don't owe it, they should pay you interest.

If you don't plan on owing anything significant, I would reduce it to £100 just in case you marginally go over the threshold, and make sure you stick close to it. That's what I did last year.

[Louisa@InTouch]

As TheFaQQer states, you can opt to reduce your payments on account, if the total dividends you are going to take for 2014/15 are less than 2013/14.

Estimate the total income that you are likely to take and the taxes due, you can match this with the payments on account you need to make in Jan & Jul 2015.

If your income for 2014/15 is less than the payments on account you made, HMRC will pay you some interest and refund the difference when your 2014/15 self assessment is filed.

But if your reduce your payments on account too low, HMRC can charge late payment interest on the difference between your reduction and the payment on account you should have made.

Another consideration, if you are strapped for cash is take a director's loan from the business, no more than £10,000 (in the tax year) and then no benefit in kind implications will apply. But you will need to repay within 9 months of your year end so s455 charge (25% of the outstanding balance) doesn't apply.

[Freaki Li Cuatre]

As TheFaQQer states, you can opt to reduce your payments on account, if the total dividends you are going to take for 2014/15 are less than 2013/14.

Estimate the total income that you are likely to take and the taxes due, you can match this with the payments on account you need to make in Jan & Jul 2015.

If your income for 2014/15 is less than the payments on account you made, HMRC will pay you some interest and refund the difference when your 2014/15 self assessment is filed.

But if your reduce your payments on account too low, HMRC can charge late payment interest on the difference between your reduction and the payment on account you should have made.

Another consideration, if you are strapped for cash is take a director's loan from the business, no more than £10,000 (in the tax year) and then no benefit in kind implications will apply. But you will need to repay within 9 months of your year end so s455 charge (25% of the outstanding balance) doesn't apply.

Yes of course -Director's loan will soften the blow. Thanks.

[ronanm]

As TheFaQQer states, you can opt to reduce your payments on account, if the total dividends you are going to take for 2014/15 are less than 2013/14.

Estimate the total income that you are likely to take and the taxes due, you can match this with the payments on account you need to make in Jan & Jul 2015.

If your income for 2014/15 is less than the payments on account you made, HMRC will pay you some interest and refund the difference when your 2014/15 self assessment is filed.

But if your reduce your payments on account too low, HMRC can charge late payment interest on the difference between your reduction and the payment on account you should have made.

Another consideration, if you are strapped for cash is take a director's loan from the business, no more than £10,000 (in the tax year) and then no benefit in kind implications will apply. But you will need to repay within 9 months of your year end so s455 charge (25% of the outstanding balance) doesn't apply.

Didn't realize the director's loan limit had increased from £5k to £10k. Am in the same boat as the OP so great to hear. Thanks

[duffy78]

Quick question regarding payments on account. I have applied for a reduction as my tax for this tax year is going to be less than what is required for last. I applied for the reduction online but haven't heard anything from HMRC whether they have accepted this reduction or not.

I'm assuming that they would have at least sent a message to my online self assessment page, is this correct? Or do they just accept it and then balance it all up under next years self assessment?


Thanks

[Craig at Nixon Williams]

Quick question regarding payments on account. I have applied for a reduction as my tax for this tax year is going to be less than what is required for last. I applied for the reduction online but haven't heard anything from HMRC whether they have accepted this reduction or not.

I'm assuming that they would have at least sent a message to my online self assessment page, is this correct? Or do they just accept it and then balance it all up under next years self assessment?


Thanks

You can check this by logging in to HMRC's site and looking at your self-assessment account - they should have updated the balance on there if the application was done correctly.