Self-assessment payments on account of tax are due when your previous year’s balancing payment exceeded £1,000 and was more than 20 per cent of your total tax liability for the year after taking into account any tax deducted at source such as PAYE. You are, therefore, most likely to make them if you are self-employed or receive rental income or significant savings income.

Payments on account are estimates of your tax bill for a year based on what you had to pay for the previous tax year. Half is paid on 31 January in the tax year, with the other half being paid on six months later on 31 July following the end of the tax year. This is fine if your income is regular, but what if your income tax liability in 2022/23 is likely to be lower than that for the year to 5 April 2022 (2021/22)?

This could be the case if one of the following applies to you:

• Your business profits have fallen in the accounting year ending in the 2022/23 tax year
  
• You have retired, or stopped working
  
• You have sold a property you previously let out
  
• You received a one-off taxable lump sum in 2021/22
  
• You made additional pension contributions or invested in VCTs or EIS companies in 2022/23.
  

Thankfully, a claim can be made to reduce payments on account if you think your tax liability for 2022/23 will be lower than that for 2021/22. This is best done by filing your tax return for 2022/23 before 31 July, as HMRC will then automatically reduce the payments on account to the correct amounts, but if you are not in a position to do this, you can make a claim to reduce the payments on account based on your best estimate of the tax that will be due.

Please bear in mind, though, that if your final tax bill exceeds the reduced payments on account, interest will be payable, and you could even be charged a penalty if HMRC think you have excessively underestimated your tax bill.

If you have recently received your statement from HMRC demanding the second payment on account due at the end of July, and you think your tax bill will be lower for 2022/23, you should consider collecting your tax return information together as soon as possible so that a review of your tax position can be done in advance of making the second payment on account to HMRC by 31 July 2023.

Please be aware that you do actually have to make a claim to HMRC to reduce the payments on account. If you just pay what you think is due without telling them, they will soon be chasing you for the balance!

If you think this may affect you, and want to discuss what you can do to reduce your future tax bills, please contact Neil Spicer, Tax Associate, on 01245 254236 or neil.spicer@rickardluckin.co.uk