HMRC Bills Loom for Millions
Across the UK there are over 5 million people who are self-employed and each year must submit self-assessment tax forms to HMRC.
For those that do, and normally submit their forms online, the next deadline will be the 31st January 2021.
However, as we all know, there has been nothing normal about this year, and that is not likely to change for those who have Self-Assessment forms to submit by the 31st January 2021. This is particularly the case if they have a tax bill that needs to be paid.
The likelihood, however, is that due to the disruption that has been caused by the Coronavirus Crisis more people will struggle to make payments next month.
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What Tax Year will People be liable for?
The problem is when people submit their next self-assessment form, if they have not already, it will be for the tax year 2019/20 which ended on the 5th April 2020, just as the Coronavirus Lockdown began. That means the bill they will receive will partly be for income they have generated this year (2020/21) and also income they have generated in the previous financial year (2019/20).
How are Self-Assessment Tax Bills made up?
When people receive their tax bill, it is normally made up in two parts. These are known as:
- Balancing Payments; and
- Payments on Account
The first of these, the Balancing Payment, is for everything that remains owed from the preceding financial year. So, if you submit a return by the 31st January 2021, the balancing payment will be for what remains owed for the financial year that ended on the 5th April 2020.
Balancing payments have to be paid by the 31st January that follows the end of the financial year.
The second part, the Payment on Account, is half of what HMRC calculate your tax bill was for the previous financial year and goes towards what you owe for the current financial year, in this case 2020/21.
Both these payments will become due by the 31st January 2021.
Deferred Payments on Account
However, the problem is, people who are self-employed normally make two Payments on Account each year: the first by the 31st January and the second by the 31st July. So this year, the second Payment on Account would have been due by the 31st July 2020.
However, due to the Coronavirus Crisis, HMRC offered people earlier in the year the option of deferring this payment. It will now be due to be paid by the 31st January in the form of a balancing payment, if the submitted self-assessment form shows it is due.
This means, that for many, this year’s balancing payment may be more than normal, as they didn’t make their second Payment on Account in July.
So, unless people have made provisions for this and set aside funds for it, they may find next month they are going to struggle to pay what they owe.
So, what can you do?
Well, the first thing people should do is submit your self-assessment form for 2019/20 as soon as possible.
This will allow you to see how much HMRC is expecting you to pay by the 31st January 2021.
If your income has also been heavily impacted this year by Coronavirus, you may want to consider requesting your Payment on Account be reduced.
Basically, a Payment on Account presumes you are going to earn in the current year what you earned in the preceding year. If you know this won’t be the case, you should inform HMRC.
However, you need to be cautious when you are estimating your current year income: if you underestimate what you will earn, you may end up with a larger balancing payment that needs to be paid by the 31st January 2022; equally if you over-estimate it, you may have to make a larger Payment on Account by the 31st January 2021 and the 31st July 2021.
Also, when calculating what you earn, you should remember to include any benefits you have claimed and will claim before the 5th April 2021; and also any grants you have received from the UK Government’s Self-Employed Support Scheme, as these count as taxable income.
Time to Pay Agreements
Second, if you think you are going to struggle to make any Balancing Payment for 2019/2020 (this may include amounts that you should have paid in your Payment on Account that was due in July), you should aim to submit your self-assessment form as soon as possible, so HMRC can calculate how much you owe.
You can then apply to them, before the 31st January 2021, for a Time to Pay Agreement.
Payment from PAYE
Another option that may be available to people who also pay tax through the PAYE system or who are no longer self-employed, is to submit their self-assessment form before the 30th December 2020.
If they do this and certain conditions are met, they can then request their tax liability is recovered from their other income through the PAYE system.
The conditions that have to be met, to qualify for this, is the amount owed must be less than £3,000 and it must be possible to recover that amount within 12 months through the PAYE system. You will not be eligible to do this, if to recover it within 12 months, you would need to pay more than 50% of your current income in tax, or pay double the level of tax that you would normally pay through the PAYE System.
If you believe you are going to struggle to meet your tax liabilities by the 31st January 2021, you can speak with a Creditfix Money Adviser on 0808 253 2966. All advice is free and confidential.