05 August 2023
An individual taxpayer must make payments on account towards their following year’s tax and class 4 National Insurance contributions (NICs) liability when the balance of the previous year’s liability exceeds £1,000 and less than 80% of that year’s liability was deducted at source; eg through PAYE. Where required, two equal instalments are payable, on the 31 January prior to the end of the tax year and the 31 July following the end of the tax year.
No penalties are applied to late payments on account, provided that the tax is settled in full within 30 days of the following 31 January. As the cost-of-living crisis continues, a significant number of individuals are likely to be increasingly strapped for cash. This, combined with the lack of an immediate penalty, may tempt people into reducing or delaying their payments on account.
However, late payment interest is charged on overdue payments on account. For most tax payments, HMRC charges late payment interest at an annual rate equal to the Bank of England base rate plus 2.5%. Following successive hikes in base rate over the last 18 months, HMRC’s late payment interest rate now stands at 7.5%.
Many taxpayers may be significantly worse off than they were a couple of years ago, due to the increased cost of living. Nevertheless, their average take-home income may well have increased, due to inflation-chasing pay rises and inflation-linked increases to pensions, as well as increased returns on savings income. As an individual’s taxable income increases, so does their exposure to tax. For example, individuals may incur a higher marginal rate of tax, as well as other income-related tax charges, like the high-income child benefit charge. Therefore, many individuals should anticipate growing tax bills.
Some of the worst affected taxpayers may be residential landlords, who may be seeing their cash profits decline steeply due to rising borrowing costs but see little change in their income tax bill due to the restriction of tax relief for finance costs.
Individuals who are concerned about their outstanding and upcoming tax liabilities should look to address their tax affairs as soon as possible. The sooner an individual’s tax position is reviewed, the longer they will have to prepare to meet an upcoming tax liability and also consider tax planning options, which may improve tax-efficiency and reduce future tax bills.
If further incentive is needed, it is worth noting that no tax relief is given for late payment interest suffered and, unlike late payment penalties, it is not possible to appeal an assessment of late payment interest.
The option to meet a balancing tax liability by a PAYE coding adjustment may be a saving grace for those on top of their tax affairs; if an individual files their 2022/23 tax return prior to 31 December 2023 (31 October for paper tax returns), it may be possible to meet their tax liability by a PAYE coding adjustment to the 2024/25 tax year, provided the balancing liability is less than £3,000 and they have a PAYE source of income. The option of coding a tax liability allows taxpayers to defer payments beyond the usual 31 January payment deadline whilst avoiding the exposure to late payment interest.