A timely review of payments on account

Tax returns must be filed by 31 January after the end of each tax year, so the deadline for the return for 2020/21 was 31 January 2022. A series of automatic penalties then begin to accrue if the return remains unfiled. 31 July is six months after the standard deadline, and marks the trigger for another penalty of the lower of 5% of any tax outstanding, or £300. There is also a 5%/£300 penalty if the return is filed, but any of the balancing payment remains unpaid at midnight on 31 July. Interest will also be added, meaning the bill can increase quickly. 31 July is also the second payment date for those who are required to make payments on account. Late payments on account don’t attract penalties, but do have interest added. However, it is advisable to review the level of income and tax paid at source before making the second payment.

By default, the payments on account are calculated as half of the balancing payment from the previous year. The idea is that when the next year’s return is filed, most of the tax will have been paid already. However, if the income has decreased, or tax paid at source, e.g. via PAYE, has increased, overpayments can occur. This will be reconciled when the return is submitted, but a claim can be made to reduce the payments on account. This can be handy if the return can’t yet be filed, e.g. if a trader is waiting for accounts to be prepared. The payments should be reduced to half the amount the individual thinks will be outstanding on the 2021/22 return. Note that they should ignore any tax paid under PAYE - it’s the unpaid amount that is important. This could give a vital cash flow boost with the ongoing cost of living crisis.

Payments can be reduced via the personal tax account. But individuals shouldn't be tempted to reduce them too much, as the payments will be reinstated when they eventually file the return, and interest will be applied.