Reduce payment on account: can you lower your 31st July tax bill?

If your income has fallen since last year, you may be wondering whether you can reduce payment on account before the 31st July Self-Assessment deadline. The short answer is yes – in some cases. But the reduction needs to be based on a realistic estimate of what your tax bill will actually be.

What is a payment on account?

A payment on account is an advance payment towards your next Self-Assessment tax bill. HMRC normally asks many Self-Assessment taxpayers for two payments each year: one by 31st January and one by 31st July. Each is usually half of the previous year’s tax bill.

Not everyone has to make payments on account. They usually apply if your previous year’s Self-Assessment tax bill was £1,000 or more. However, you normally will not have to make them if more than 80% of that tax was already collected outside Self-Assessment, for example through PAYE.

This system works well when your income stays roughly the same from year to year. However, it can leave you overpaying if your circumstances have changed.

Why might your 31st July payment be too high?

There are several common reasons why HMRC’s figure may no longer reflect your situation. For example:

• Your business profits have fallen
• Your rental income has reduced
• A one-off item of income has not repeated this year
• You have stopped trading
• Your pension contributions or Gift Aid payments have changed
• More tax has been deducted at source than in the previous year
• Your tax relief has increased

If any of these apply, the figure HMRC has calculated may be higher than your actual liability for the current year. In that case, a reduction could be appropriate.

How do you reduce payment on account with HMRC?

You should not simply pay a lower amount and hope for the best. HMRC has a clear process, and you need to follow it.

You can apply to reduce your payments on account online through your Government Gateway account. If you cannot apply online, you can fill in and post form SA303. Either way, you will need a reasonable estimate of what your tax bill is likely to be for the current year.

You can still apply after the 31st July payment date, but you must make the claim by 31st January after the end of the relevant tax year.

If you are unsure whether your July payment is too high, THP can check the figures for you before you act. We can estimate your current-year tax position and advise whether a reduction makes sense. Find out more about our Self-Assessment Tax Return service.

What happens if you reduce it too much?

This is where you need to be careful. If you reduce your payment on account and your final tax bill turns out to be higher than you estimated, you will still owe the difference. HMRC will collect this as part of your balancing payment the following January, and interest may apply.

Reducing your payment can genuinely help cash flow. However, the figure needs to be realistic. An estimate that is too optimistic may simply delay the problem rather than solve it.

Should you reduce the payment, or pay it anyway?

This depends on how confident you are in your figures.

If your income has clearly fallen and you have a reasonable sense of your likely tax liability, applying for a reduction is a sensible step. There is no reason to tie up cash unnecessarily.

However, if your position is uncertain – perhaps your income has been unpredictable, or you are unsure what allowances and reliefs apply – it may be worth calculating your likely liability before you act. The aim is not simply to pay less in July. It is to pay the right amount, at the right time, with no unnecessary surprises later.

A falling income or changed profit pattern may also be part of a wider picture. In some cases, this is worth reviewing alongside longer-term tax planning advice – particularly if your circumstances have shifted significantly.

How THP can help

THP works with sole traders, landlords, freelancers and company directors. If your July payment looks too high, we can compare HMRC’s figure with your likely tax position for the current year. That gives you a firmer basis for deciding whether to reduce the payment, leave it as it is, or plan for the balancing payment in January.

We can:

• Prepare your Self-Assessment return
• Estimate your current-year tax position
• Advise whether applying to reduce your payment on account is appropriate
• Help you avoid an unexpected shortfall later

If the issue is not that the payment is too high, but that you cannot afford to pay it, you may need to look at HMRC’s payment options, such as a Time to Pay arrangement.

If you are unsure what to pay, get in touch with THP before the 31st July deadline. We can help you check the figures and decide whether a reduction is appropriate.