SALF303 - Payment of tax: payments on account
Payments on account are normally required if the taxpayer was assessed to income tax under section 9 Taxes Management Act 1970 in the preceding year
Payments on account are normally required from any taxpayer who self asseses to income tax under section 9 of TMA 1970, in any amount, for the preceding tax year. Section 9 TMA is the legislation that requires a taxpayer who files a tax return to make a self assessment of their income tax liability for a tax year.
Therefore, payments on account of a person's tax liability for a tax year are only required if they filed a tax return for the preceding year. They will not be required to make payments on account if they do not file a tax return for the preceding year.
This is the case even if the self assessment has not been made at the time the payments on account are due.
The payments on account are not calculated simply by reference to the total income tax assessed in the preceding year, but by reference to 'a relevant amount' of the income tax assessed. The relevant amount is the amount by which the total income tax assessed exceeds the amount of any income tax deducted at source.
Where the relevant amount is below certain limits no payments on account are required. The limits are:
- a fixed amount of tax
- a fixed proportion of the assessed tax.
The precise value of these limiting criteria is set by regulations. The limits are set at a level that ensures that most employees and pensioners (and others who receive the bulk of their income under deduction of tax or who have relatively small outstanding tax liabilities) will not have to make payments on account. Instead such taxpayers simply have to make one balancing payment after the end of the tax year (or have the balancing payment collected through PAYE). The limits are set by the Income Tax (Payments On Account) Regulations 1996 (SI1996/1654). Under these Regulations payments on account are not due where the relevant amount is less than:
- a fixed amount of £1,000, or
- the proportion the relevant amount bears to the assessed amount is less than 1 to 5.
So if more than 80% of the assessed tax is met by income tax deducted at source no payments on account are required.
No taxpayer is required to pay in either payment on account more than 50% of the relevant amount for the preceding year, even though it may already be clear, at the time the payments are made, that the actual liability for the year will exceed that for the preceding year.
Capital gains tax and student loan repayments are excluded from the computation of payments on account. So any capital gains tax or Student Loan repayment is simply payable as part of the balancing payment on 31 January following the tax year.
When computing the 'relevant amount' under section 59A(1), or when claiming to reduce or cancel payments on account, the tax deducted at source will include:
- any income tax deducted (or treated as deducted) from any income, or tax treated as paid on any income
- any PAYE tax deducted at source in respect of that year (ITEPA03/S684) including any tax that will be deducted under PAYE in a subsequent year
- any credit on dividends etc (ITTOIA05/S397 and 397A).
Any amounts deducted at source under ITEPA03/S684 in a tax year in respect of a previous year will be excluded.
Foreign tax is not within the definition of tax deducted at source. However, it is a constituent part of the calculation to arrive at the figure of 'assessed tax' (see S59A(1)(b)). It is that figure of 'assessed tax' which allows you to calculate the 'relevant amount' for the purpose of fixing the payments on account due.
References to payment of income tax apply equally to payments of Class 4 NICs (sections 15 and 16 Social Security Contributions and Benefits Act 1992). So in practice each payment on account includes a payment on account of the Class 4 NICs liability for the year.
The self assessment for a taxpayer in the construction industry shows the following for 2003-04.
- Gross income tax assessed : £8,500
- Gross capital gains tax assessed : £2,360
- Gross Class 4 NIC : £650
- Tax deducted at source: £1,750
- Credits on dividends received : £345
The relevant amount is income tax assessed for 2003-04 less income tax deducted at source for 2003-04.
The relevant amount of income tax for 2003-04 is therefore
(8,500) - (1,750 + 345) = £6,405.
The relevant amount of Class 4 NICs for 2003-04 is simply
(650) - (0) = £650.
No payment on account is required in respect of capital gains tax.
The payments on account are each equal to 50% of the relevant amount (unless the taxpayer makes a claim that they should be reduced, see SALF303).
Whenever payments on account are required for any tax year they are payable without demand.
- The first on or before 31 January of that tax year.
- The second on or before 31 July next following that tax year.
Self assessment tax returns are designed to guide taxpayers through the calculation of payments on account etc. The Internet service for sending in a tax return will calculate the tax and the following year's payments on account automatically. Taxpayers can get help from their local HMRC office or any HMRC Enquiry Centre. HMRC remind taxpayers that payments are due. Where possible the reminder states the amount that is due.
Example: Calculation of payments on account
Consider the example at Example: Calculation of relevant amount above. The relevant amounts for 2003-04 were:
- Income tax: £6,405
- Class 4 NIC: £650
Therefore the payments on account required for 2004-05 are:
- 31 January 2005: £3,202.50 + £325
- 31 July 2005: £3,202.50 + £325
The normal self assessment rules for the collection and recovery of income tax apply to payments on account as they apply to the final balancing payment. Interest is charged on any payments on account made late, from the due date for payment. Any tax not paid as a payment on account automatically becomes due as part of the balancing payment for the year. A tax- geared surcharge may be sought on any part of the balancing payment that is paid late (see SALF306 to SALF307).
Section 59A(3) & (4)
The payments on account required for any tax year are calculated by reference to the tax liability for the preceding year. For those taxpayers whose tax liability is relatively constant from year to year this method of calculation ensures that the payments on account required approximate to the additional tax required over and above any tax deducted at source during the year.
But it is always possible that a taxpayer's circumstances change significantly from one year to the next. In such circumstances, it is possible that the payments on account, as originally calculated, eventually result in a net overpayment of tax for the year.
In order to avoid overpayments of tax a taxpayer may make a claim to reduce or cancel the payments on account. Claims are required to ensure that HMRC does not commence recovery proceedings to enforce payment for tax that will have to be repaid at the balancing payment date.
Any such claim must state the taxpayer's 'belief that':
- there will be no income tax liability for the current tax year or that any such liability will be covered by income tax deducted at source, or
- the amount due for the current year, after taking into account tax deducted at source, will be a certain amount which is less than the amount of payments on account based on the preceding year.
The claim must include the grounds for that belief. If the claim does not give these details it has not been properly made.
The taxpayer can make the claim in a tax return, in a claim form, or in a letter. HMRC has no power to reject such claims that are properly made. However, after processing, any such claim may be reviewed to identify negligent or fraudulent claims.
Claims to reduce payments on account must be made before the 31 January next following the year of assessment. For example, a claim to reduce the payments on account for 2005-06 should be made before 31 January 2007.
Following any such claim the payments on account are reduced or cancelled, as appropriate, to reflect the taxpayer's view of what payments on account, if any, are due for the current tax year.
If the payments have already been made any overpayment is refunded, with repayment interest.
Example: Adjustment following a claim to reduce payments on account
In Example: Calculation of payments on account above payments on account for 2004-05 were calculated as:
- 31 January 2005: £3,202.50 + £325
- 31 July 2005: £3,202.50 + £325
It might be that in 2004-05 the taxpayer has more tax deducted at source than was the case in 2003-04. For example, if a higher proportion of all work carried out is subject to CIS25 deductions the payments on account of income tax could be recalculated as follows:
- Gross income tax assessed for 2003-04: £8,500
- Credits on dividends received in 2003-04: £345
- Estimate of CIS tax deducted at source in 2004-05, say £6,000
In the circumstances it would be reasonable to claim that the total amount to be paid as payments on account of income tax should only be:
(8,500) - (6,000 + 345) = £2,155
(The total payment on account of Class 4 NICs for 2003-04 is unchanged at £650)
So the revised payments on account are:
- 31 January 2005: £1,077.50 + £325
- 31 July 2005: £1,077.50 + £325
A penalty is charged where a taxpayer fraudulently or negligently makes any incorrect statement in connection with a claim to reduce or cancel payments on account. The maximum penalty is the difference between the amount that would have been paid but for the incorrect statement and the amount of the payments on account actually made. The amount of the penalty will be determined by an officer of the Board under TMA70/S100 in an amount not exceeding the maximum. On appeal, the penalty may be confirmed, amended or set aside by the tribunal (section 100B).
So, for example, if the claim that gave rise to the reduction considered in Example: Adjustment following a claim to reduce payments on account above turned out to be false the maximum penalty would be:
(6,405 + 650) - (2,155 +650) = £4,250
A penalty cannot be sought in cases of innocent error and is not sought against a taxpayer who, in making the claim, acted in good faith and either:
- got the sums wrong (and had no reason to suspect that they were wrong), or
- acted on the basis of information that was correct at the time of the claim, but which subsequently changed.
The intention of this penalty is to prevent gross or persistent abuse. So HMRC seek to penalise those taxpayers who claim large reductions without any foundation or who, year on year, make claims under this section which result in them paying less than they should.
Once the tax return for the year is received HMRC may look to see whether there is a significant difference between the amount of income tax that is shown to be due and the amount paid as reduced payments on account. Where there is a significant difference, or someone persistently claims excessively reduced payments on account, HMRC will want to examine the grounds on which the claims were made and whether or not they were realistic, at the time, and made in good faith.
Changes to payments on account when 'relevant amount' not established until after the first date for a payment on account
Section 59A(4A) & (5)
- a self assessment for the previous year is not made on time, or
- a self assessment made at the normal time is amended
the correct 'relevant amount' may not have been established in time to be reflected in payments on account for the current year.
Where either of these situations applies the 'relevant amount' for the current year is revised by reference to the final liability for the previous year as shown in the late self assessment, or the amended self assessment. The amount of the payments on account due are deemed to have always been 50% of this revised relevant amount. Therefore the taxpayer is required to pay any additional amounts and interest due as the result of revisions to the payments on account.
Example: Adjustment to previous year and revision of relevant amount
A taxpayer's self assessment for 2010-11 is £3,000. Therefore the payments on account for 2011-12 are:
- 31 January 2012: £1,500
- 31 July 2012: £1,500
These payments are made on time and in the correct amount, but after an enquiry into the 2010-11 return the liability for the year is revised upwards to £4,500. An amended self assessment is made on 1 November 2012.
Each payment on account for 2011-12 is reset to £2,250, an increase of £750. Interest will arise on each underpayment until paid. The interest charge runs from the original due dates (31 January and 31 July 2012) until the date of payment.
Where a taxpayer has made a self assessment for the preceding year (under TMA70/s9) and HMRC subsequently makes a discovery assessment for that year (under TMA70/S29) half of the amount of the income tax due under the assessment is added to each existing payment on account. The payments on account are deemed to have always included this additional amount. If the assessment is varied the amount included in the payments on account also varies.
An officer of the Board may direct that a taxpayer need not make any payments on account for a given year. Any such direction must be made before the 31 January next following the year in question. Once such a direction has been made any consequential adjustments must also be made. For example, it might be necessary to repay any payment on account already made.
Directions under this section are issued:
- where the taxpayer has ceased to be within self assessment, and
- for tax equalised foreign national employees whose employers have entered into an agreement with HMRC to use the 'modified PAYE' scheme.
Where a source has ceased or a taxpayer has received an unusual payment, HMRC cannot know what other circumstances will apply in the following year and so cannot tell that payments on account will not be properly due. In such cases HMRC do not issue a direction under S59A(9). The taxpayer can make a claim to reduce or cancel the payments on account (see Claims to reduce or cancel payments on account to the end of Incorrect claims to reduce or cancel payments on account above).