Payments on Account and Late Filing Penalties for Income Tax Returns

How Payments on Account Work for UK Taxpayers

For many UK taxpayers, understanding the intricacies of the Self Assessment system can be daunting. Among the key components is the concept of Payments on Account, which is designed to help spread the cost of your tax bill across the year. This article will demystify how Payments on Account work and what taxpayers need to know to stay on top of their obligations.

What Are Payments on Account?

Payments on Account are advance payments towards your income tax liability for the following tax year. These are generally required if your tax bill exceeds £1,000 and less than 80% of your income tax is collected at source (e.g., through PAYE for employees). Essentially, these payments help HM Revenue & Customs (HMRC) collect tax owed in a more gradual manner.

Payments on Account apply primarily to:

• Self-employed individuals
• Landlords earning rental income
• Taxpayers with significant untaxed income (e.g., investments or dividends)

Each Payment on Account is based on 50% of your previous year’s tax bill. For example, if your total tax liability for the 2023/24 tax year was £4,000, you would make two Payments on Account of £2,000 each for the 2024/25 tax year.

When Are Payments on Account Due?

Payments on Account are due in two instalments:

1. 31 January – The first instalment is due alongside any balancing payment for the previous tax year.
2. 31 July – The second instalment is due midway through the current tax year.

If your actual tax bill for the year turns out to be higher than estimated, you will need to make a balancing payment by the following 31 January. Conversely, if your tax liability is lower, you may receive a refund or carry forward an overpayment to reduce future Payments on Account.

Can You Reduce Payments on Account?

If you believe your income for the upcoming year will be lower than the previous year, you can request to reduce your Payments on Account. This can be done by logging into your HMRC account and submitting a reduction request. However, caution is advised—underestimating your tax bill may result in interest charges on the underpaid amount.

Who Is Exempt from Payments on Account?

You will not be required to make Payments on Account if:

• Your last Self Assessment tax bill was less than £1,000.
• More than 80% of your tax is collected at source (e.g., via PAYE).

Understanding Payments on Account and keeping track of deadlines is crucial to avoid unnecessary stress and penalties. Taxpayers are encouraged to plan their finances accordingly to ensure sufficient funds are available when payments are due.

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Penalties for Late Filing of Self Assessment Income Tax Returns

Meeting Self Assessment deadlines is not just about avoiding stress—it’s about avoiding penalties that can quickly escalate. This section outlines the consequences of late filing and how taxpayers can minimise risks of incurring additional charges.

Deadlines for Filing and Payment

The key deadlines for Self Assessment are:

• 31 October – Deadline for submitting paper tax returns.
• 31 January – Deadline for filing online tax returns and making balancing payments for the previous tax year.

Missing these deadlines can result in penalties and interest charges, even if no tax is owed.

Penalties for Late Filing

HMRC imposes penalties for late filing as follows:

1. Initial Penalty (£100):

   • This applies immediately if your tax return is filed even one day late. It applies whether or not you owe any tax.

2. Daily Penalties (£10 per day):

   • If your return is over three months late, you will be charged an additional £10 per day for up to 90 days, resulting in a maximum of £900 in daily penalties.

3. Six-Month Penalty (£300 or 5% of the tax due):

   • After six months, you will face an additional penalty of £300 or 5% of the tax owed, whichever is greater.

4. Twelve-Month Penalty (£300 or 5% of the tax due):

   • At twelve months late, the same penalty as the six-month mark applies. However, in serious cases, the penalty can rise to 100% of the tax due.

Penalties for Late Payment

Separate penalties apply for failing to pay your tax bill on time:

1. 5% of the Tax Owed:

   • This is charged if payment is 30 days late.

2. An Additional 5%:

   • Charged at six months late.

3. Another 5%:

   • Applied at twelve months late.

Interest Charges

In addition to penalties, interest is charged daily on any outstanding amounts, including unpaid tax and penalties. The current interest rate of 7.25% is set by HMRC and is subject to change, so it’s essential to check their website for the latest rates. Either way, it's a very high rate to have to pay.

Appeals and Reasonable Excuses

If you have a genuine reason for missing the deadline, such as illness or technical issues, you may appeal the penalties. To succeed, you must demonstrate a reasonable excuse and resolve the issue promptly. In our experience it is very difficult to get HMRC to accept a reasonable excuse. Examples of possible excuses include:

• your partner or another close relative died shortly before the tax return or payment deadline
• you had an unexpected stay in hospital that prevented you from dealing with your tax affairs
• you had a serious or life-threatening illness
• your computer or software failed while you were preparing your online return
• issues with HM Revenue and Customs (HMRC) online services
• a fire, flood or theft prevented you from completing your tax return
• postal delays that you could not have predicted
• delays related to a disability or mental illness you have
• you were unaware of or misunderstood your legal obligation
• you relied on someone else to send your return, and they did not

In any case, you must send your return or payment as soon as you’re able to.

Avoiding Penalties

To avoid penalties, taxpayers should:

1. File Early:

   • Avoid last-minute submissions to prevent technical glitches or errors.

2. Set Reminders:

   • Use calendar alerts or HMRC’s email reminders to stay on top of deadlines.

3. Seek Professional Help:

   • Engage an accountant or tax advisor to ensure accuracy and timely filing.

Understanding and adhering to Self Assessment deadlines is essential for UK taxpayers. The penalties for late filing and payment can be significant, but with proper planning and awareness, they can be easily avoided. Taxpayers are encouraged to act promptly and seek assistance if needed to ensure compliance with HMRC regulations.