Planning my tax payments on account
QUESTION: I'm due to make my second Payment on Account today (July31) to HM Revenue & Customs. My accountant advised me of my payment for the end of July some time ago but suggested that I could reduce the payment as my business profits have reduced in comparison to last year. What are the implications if I do not pay the full amount due and is there any possibility that I can reduce the amount that is due?
ANSWER: Payments on account are 50 per cent of an individual's net tax liability for the previous year, and are used to “prepay” the tax liability due for that relevant tax year. These payments are due to be made on January 31 and July 31 each year. All individuals are liable to make these payments unless their net tax liability payable is less than £1,000 or 80 per cent of the tax due for the tax year was deducted at source.
If your income and subsequent tax liability for the 2016/2017 tax year is likely to be significantly less than 2015/2016, you can make a claim to reduce your payments on account. The amount by which you reduce your payments should reflect your estimation of your tax liability for the 2016/17 tax year, which is due to be paid by January 31 2018.
However, if it is later found that you have reduced the payments on account by too much, you will be liable to pay interest on the difference between the amounts paid as payments on account and the amount actually due. Equally, if you have underestimated the fall and paid too much, you will be due a refund and will receive an interest supplement.
Getting your information to your accountant to allow them to complete your tax return prior to July 31 2017 will enable them to calculate what your liability will be for 2016/17 and therefore advise you on whether to reduce your payments on account or not and will also help to avoid any shortfall in tax paid by you by January 31 2018.
Filing you tax return early before the January 31 deadline will mean you should receive any tax refund you may be due soon after submission. In instances where you think you have overpaid tax, be sure to get your return in as promptly and early as possible. That way you can obtain your refund sooner.
Filing your tax return results in a tax liability calculation and presents you with the total tax bill you owe to HMRC. In that sense doing so earlier means you can plan and give yourself more time for setting money aside for payment. This then allows you to better manage your cash flow and finances.
:: Malachy McLernon (firstname.lastname@example.org) is a director of PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.