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Do you have a July payment on account to make soon? With the deadline fast approaching consider how you may be able to reduce it.

What are payments on account?

Payments on account are advance payments towards your tax bill, including Class 4 National Insurance if you’re self-employed.

You have to make 2 payments on account every year unless:

  • Your last Self Assessment tax bill was less than £1,000
  • You’ve already paid more than 80% of all the tax you owe. This may be through your tax code or if your bank has deducted interest on your savings.

Each payment is half your previous year’s tax bill and payments are due by midnight on 31 January and 31 July.

If you still have tax to pay after you’ve made your payments on account, you must make a ‘balancing payment’ by midnight on 31 January next year.

Is there anything I can do to reduce my payment?

If your income is likely to be lower in the following tax year, against which your payment on account will be offset, then you can reduce your payment on account, working out what your tax liability is likely to be.

If your income and/or profit levels are going to be around the same level, then there may be other options you could consider to reduce your payments.

Three key options to consider:

1) Qualifying investments in Enterprise Investment Schemes (EIS)

These are investments that can provide a 30% Income Tax reduction, for the current tax year or previous. They also have a number of other tax benefits such as no Capital Gains Tax on sale, the deferral of Capital Gains Tax on proceeds reinvested into an EIS, exempt from Inheritance Tax after 2 years and the ability to claim relief for any loss made, if certain conditions are made.  If you are interested in exploring tax efficient investments then you should discuss the EIS option with your financial adviser to find out if they are suitable for you.

2) Review how you extract profits from your business; undertake remuneration planning

The gap between the tax efficiencies of paying salary or dividends from a family company has narrowed and it is therefore vital families review their remuneration plans more regularly.  One option could be; reduced income and greater company pension contributions which would support lower Income Tax bills and lower Corporation Tax bills. Naturally each shareholder will have different circumstances and therefore having a remuneration plan for each shareholder is important.

3) Review your property portfolio

If you have a property portfolio, then you should seek advice as the rules have changed significantly over recent years.  How you hold the properties, and any income generating assets for that matter, will impact how much an individual, couple or family are taxed. You should explore that best structure in which to hold your properties and seek advice on the correct ownership, to support not only reducing Income Tax but other taxes such as Capital Gains Tax and Inheritance Tax.

HMRC system problems – don’t get caught out

If you are expecting to make a payment on account in July, but you have not received a demand from HMRC, then please speak to your advisor or HMRC directly. HMRC had issues with their systems earlier this year meaning some people will not receive the July demand and therefore likely to face bad news from HMRC after Christmas. Don’t get caught out by this and assume no news is goods, if in doubt that you have a payment due, find out before the 31 July deadline.

The planning options within this blog are not exhaustive and with all the areas highlighted, planning will vary according to the specific circumstances of each case and of course an individual’s personal and business goals. Therefore advice should always should be sort. If you would like to discuss your personal tax position and understand planning that may benefit you, then please contact Ann Bibby on 01295 250401 or email abibby@ellacotts.co.uk.