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23 December 2020

Worried about your January 2021 Tax Payment?

Tax Tips – Business Question:

I am concerned that I will not have the cash to make my normal self-assessment tax payment in January as my business and cash flow has suffered significantly since March with the pandemic. What options do I have?

‘It really does make sense to avoid that 31 January 2021 deadline rush and submit your tax return now to give yourself time to plan your tax payments,’ says Malachy McLernon

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HMRC have recently expanded an online service which now allows more people to spread payment of their January 2021 tax bill over 12 months. If you have time over the next few weeks, it is a good idea to complete your 2019/20 tax return so it can be submitted well before the online filing deadline of 31 January 2021. This may help you to get organised early and set up a payment plan for your January tax bill if you need to.

After you complete and submit your tax return for the year ended 5 April 2020, if you qualify for this flexible approach offered by HMRC, you can get your payment plan set up anytime up to the end of March 2021.

While the normal deadline for online returns for 2019/20 is 31 January 2021, the sooner you get your return in, the sooner you will know the amount of tax you owe and can organise your payment plan.

For many people in self-assessment, and particularly the self-employed, the tax payment due in January 2021 will be made up of the balancing payment for the 2019/20 tax year and the first payment on account for the 2020/21 tax year as usual.

However, it may also include the deferred 2019/20 second payment on account if you took advantage of the government’s offer to defer this payment (normally due by 31 July 2020) until 31 January 2021.

For example, John runs a restaurant and his payments on account for the 2019/20 tax year (based on his 2018/19 tax return) were £2,000 each. He paid the first instalment as part of a total payment of £3,200 in January 2020. He had to close his restaurant for three months due to lockdown in the spring of 2020. As a result, he could not afford to pay the second payment on account of £2,000 due on 31 July 2020, so the payment was automatically deferred by HMRC. Therefore, on 31 January 2021 John is due to pay his balancing payment for 2019/20 and his first payment on account for 2020/21, and also the deferred payment on account for 2019/20. In some cases this can be a large figure.

Once you have submitted your 2019/20 tax return, you will know how much you are due to pay by 31 January 2021. To arrange an instalment plan (a ‘time to pay’ agreement) to pay the amount due, you will need your Government Gateway account details and meet the following criteria:

  • you must have no outstanding tax returns, debts or existing payment plans with HMRC,
  • you owe no more than £30,000,
  • you must set up the payment plan within 60 days of the original payment date, and
  • you have to pay the instalments by direct debit.

The tool asks whether or not you want to pay a lump sum up front and also the amount of the instalments that you want to pay and over what time period (up to the maximum of 12 months). HMRC believe that around 95% of self-assessment taxpayers due to make a payment by 31 January 2021 will be able to use this self-serve option.

Arranging an instalment plan with HMRC does not mean you can avoid interest charges. Interest (currently at a rate of 2.6% per annum) will be charged from 1 February 2021 on amounts unpaid by 31 January 2021 until HMRC receive payment.

Before setting up an instalment arrangement for the self-assessment payment due on 31 January 2021, check whether you can reduce the payment on account element relating to the 2020/21 tax year. If you can do this, it will reduce the overall amount due by 31 January 2021 and so may make an instalment plan more manageable.

For instance, if you are self-employed and your business has suffered during the last 10 months so your profits during 2020/21 are unusually low, this could apply to you. But don’t forget to include any taxable coronavirus grants (such as payments received from the Self Employment Income Support Scheme) as taxable income in 2020/21 before working out whether you can reduce your payments on account.

It really does make sense to avoid that 31 January 2021 deadline rush and submit your tax return now to give yourself time to plan your tax payments.

The advice in this column is specific to the facts surrounding the questions posed.  Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.

Contact Malachy

Malachy McLernon / Director

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