Reducing self assessment payments on account

In what circumstances is reducing self assessment payments possible?

And how can transactions you’ve made in the current year help in reducing self assessment payments?

Lots of people are understandably interested in reducing self assessment payments.

Reducing self assessment payments - image of zoo
Entrance fees to public attractions such as zoos can be gift aided.

The first instalment of your self-assessment tax bill is due on 31 January 2020.

The 31 January self assessment (SA) tax bill is a combination of two elements: a settling-up payment (or refund) for the previous tax year plus 50% of your estimate tax bill for the current year.

By default the estimate is equal to the whole of your tax bill for the previous year. You can override the default estimate if you think it’s too high.

You can ask HMRC to reduce self-assessment payments on account for 2019/20 by various means.

You can request a reduction in these payments even after the date the tax is payable has passed.

Example: Adam submits his 2018/19 tax return on 25 January 2020. His income tax bill for that year is £5000 of which he’s paid £3000 on account.

He pays £4500 to HMRC on 31 January 2020. That’s the £2000 balance of tax for 2018/19, plus 50% of his estimated income tax bill for 2019/20, £2500.

In March 2020 he realises his income for 2019/20 will be lower than the previous year’s which will result in his overall tax bill being less. Adam estimates it at £3500.

He asks HMRC to reduce his payments on account for 2019/20 to £1750 and because he’s already paid £2500 on account he can also ask HMRC to refund him £750.

However, if you ask HMRC to reduce your payments on account and your tax bill ends up being greater than what you pay, HMRC will charge interest on the difference between the amount paid and the lower of the original payments on account and your actual tax liability.

Carrying back tax relief

Tax relief for some types of transaction can be carried back from one year to the previous one.

These include reliefs for gift aid, enterprise and seed enterprise and social investment schemes.

Carrying back tax relief has a double effect on reducing your 31 January SA bill.

Because it reduces the tax payable for the previous year it also reduces the payments on account for the current one.

Example: Ben was a higher rate taxpayer for 2018/19. His SA tax bill for that year is £4000 of which he’s paid £2500 on account.

His 31 January payment is therefore £3500 ((£4000-2500 +£2000, i.e. 50% of his 2018/19 liability). In 2019/20 he’s made gift aid payments of £1200 (this counts as £1500 for income tax purposes, i.e. £1500 less basic rate tax relief of £300 which is automatically assumed to have been allow).

Ben is entitled to higher rate tax relief of £300 on the gift aid payments (1500 x (40%-20%)).  He submits his 2018/19 tax return on 30 January 2020. On it he claims the gift aid relief to be carried back to 2018/19. This reduces his 31 January tax bill by £450, i.e. £300 off 2018/19 and £150 off the payment on account for 2019/20.

Also entrance fees you’ve paid to public attractions such as zoos and National Trust membership can be gift aided.

Here are more tips on self assessment. If you have any questions, get in touch.

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