July is a month of significance for people who file tax returns and pay tax twice a year.
The main reason is that for many people (especially those whose main income is from self-employment) there is tax to pay at the end of the month. Given that that is little more than a week away I think I should explain how it works.
When your 2007/08 tax return was submitted to HM Revenue & Customs there was a resultant tax liability, or if you were lucky, a tax overpayment. If, taking into account tax deducted under PAYE or by banks, you still had to pay tax by cheque then chances are you had to pay something by January 31, 2009.
What confuses many people — unless their accountant sets it out clearly in a letter — is exactly how the January tax bill is made up.
For most self-employed people (and some others who file returns) there are actually three phases to paying the tax on their profits. Initially they pay a ‘First Payment on Account’ which for the 2007/08 year was in January 2008.
Then they pay a ‘Second Payment on Account’ which would have been July 31, 2008. Finally, if their total tax bill for 2007/08 is more than the total of those two payments, there is a balance to pay. This is sensibly called the ‘Balancing Payment’ for 2007/08 and it was payable on January 31, 2009.
What confuses people is that January 31, 2009 was also the date for a different tax payment. This time it is the First Payment on Account towards 2008/09.
The way it is worked out is that it is 50% of the total liability for 2007/08. (That is the total of the two Payments on Account plus the Balancing Payment.)
Hopefully you are still keeping up with me! So the payment you made in January 2009 was probably a combination of the 2007/08 Balancing Payment and the first Payment on Account for 2008/09.
Things are a bit simpler on July 31, 2009. The only tax payment under Self Assessment is the Second Payment on Account towards 2008/09.
Normally this payment will be the same as the Payment on Account part you paid back in January. There are two circumstances when it will be different from January:
1. If your 2008/09 Return has already been processed and the bill is less than 2007/08, or
2. If you or your accountant has asked to reduce the Payments on Account.
Reducing your Payments on Account is only appropriate if you genuinely believe that your tax bill will be less for 2008/09 than for 2007/08.
Of course the best way to know this is to have filed your return or sent the details to your accountant.
If you do believe that your 2008/09 bill will be lower then you can apply to reduce the Payments on Account.
Any reduction will be applied to both payments, so may mean there will be a credit from what you paid in January to help cover the reduced July payment. An example will show this best.
Jane’s 2007/08 tax bill was £4,000. She was asked to make Payments on Account of £2,000 in January 2009 and £2,000 on July 31, 2009 — both against the next year — 2008/09.
Now that 2008/09 is over Jane reckons her income is well down on 2007/08. She thinks her tax bill will drop to a total of £2,200 when she gets her return processed.
Jane can apply to have each payment on account reduced to £1,100.
Since Jane paid £2,000 in January 2009 she will have overpaid £900. This gets set against the July 2009 payment.
Jane will now only have to pay £200 to cover the reduced Payment on Account on July 31, 2009.
Payments on Account can be reduced by posting off the form you can download at http://tinyurl.com/kqe9tf
If you are registered to file your return online with HMRC then you can make what is called a Claim to Reduce Payments on Account via the internet once you log into your record.
One thing to watch out for. If you reduce the Payments on Account too far then when you submit your tax return they will be reinstated at the right level and you will be charged interest from the January and July due dates on the amount you did not pay back then.
As for paying the tax — there are loads of options these days — cheque, electronic banking, debit card, Post Office, even monthly (in advance) by Direct Debit.
To go directly to HMRC’s tax payment page and see the options click on http://tinyurl.com/ncpc8y
Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co — www.huston.tv or 028 9080 6080