What are you paying for?
If you are one of the many taxpayers who have recently paid your tax due for the year ended 5 April 2014, do you know which year you were actually paying for?
Generally speaking, if your tax liability for the year ended 5 April 2014 was greater than £1,000 then H M Revenue & Customs will assume that your tax liability will be the same next year, and will ask you to pay this amount up front, payable in 2 instalments, the first in January and the second in July.
For example, if your 2014 tax liability was £2,000, then you would pay the £2,000 in January 2015, and then an additional £1,000 in January 2015 and £1,000 in July 2015 which will go towards your 2015 tax liability.
When it comes around to calculating your actual liability for 2015, you will either make a balancing payment in January 2016 (if the liability was higher than £2,000) or you will receive a refund from H M Revenue & Customs (if the liability was less than £2,000). The refund will be payable to you as soon as the 2015 Tax Return has been submitted to HMRC.
Do I have to?
If you have good reason to expect your 2015 tax liability will be lower than in 2014 then you can claim to reduce the payments on account. The most common reason for this would be that profits were expected to be less in the year.
Using the earlier example, you may want to reduce your payments on account from 2 x £1,000 to 2 x £500, which would indicate that you expected your 2015 tax liability to be £1,000 or less. This can be very useful from a cash flow point of view, but it does come with a health warning, as if it transpires that you have reduced your payments on account by too much and you have to make up the shortfall in January 2016, then HMRC will cancel your claim to reduce the payments on account and charge late payment interest on the shortfall.
For example, if you reduced your payments on account to 2 x £500, but your tax liability turned out to be £2,000, you would have to pay the additional £1,000 in January 2016, but HMRC would class that as a late payment, and charge interest on the reduction of £500 from January 2015 and £500 from July 2015.
If you do not reduce your payments on account, but they are still not great enough to cover the following years tax liability, then there is no late payment interest charged but the payments due for the following year will be higher to match the increased tax liability.
If you are making payments on account, then this is just another incentive to keep your tax affairs up to date. If you have your accounts and tax return prepared before 31 July 2015, then you will know exactly what your tax liability will be for 2015. If you can see that your payments on account are too high, then you can reduce them before you pay your July 2015 payment. So, if your tax return is prepared in June 2015 and you can see that your tax liability for 2015 will be £1,500, but you have already paid £1,000 in January 2015 towards this, and are due to pay another £1,000 in July 2015, you will see straight away that you will be overpaying by £500. You can then make a claim to reduce your payments on account so that you only pay £500 in July.
If you are not able to get your accounts and tax returns completed before the end of July, then it is still advisable to complete them as soon as possible after this date, as any overpayments will be refunded to you as soon as you submit your tax return.
If you need any help or advice with the calculation of your tax payments or if you think you could be able to reduce your payments on account, then please contact us on 01872 271655 or email Lydia.firstname.lastname@example.org