Worried about your January 2021 tax bill? HMRC’s service to spread the payment may help

How are HMRC helping people with their 31 January 2021 tax bill?

Many individuals and small businesses continue to suffer financially due to the coronavirus pandemic. So you may have put off submitting your Self Assessment tax return – especially if you are worried you will not be able to pay your January tax bill.

If so, help is at hand!

HMRC are keen to support people who cannot afford to pay their tax bill in January in one go by allowing them to pay in instalments. They have recently expanded their online service so that these instalments can be arranged without the need to discuss it with HMRC staff first or provide details of current income and expenditure.

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. If you act promptly you could get a payment plan set up before Christmas and this may make it easier for you to budget for your Christmas spending.

What might be different about my 31 January tax payment for 2021?

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 (as explained in our coronavirus guidance).

For example, Jack runs a café 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 café 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 Jack 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.

How do I set up an HMRC payment plan?

Once you have submitted your 2019/20 tax return, you will know how much you are due to pay by 31 January. To arrange an instalment plan (a ‘time to pay’ agreement) to pay the amount due, you will need your Government Gateway account details to log on to HMRC’s online tool.

You must meet all the criteria for the instalment plan:

• 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.

If you don’t have a Government Gateway account, this can be set up at the beginning of the process.

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.

Will I have to pay interest on the instalments?

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.

Will I have to pay a penalty for paying my tax late?

Late payment penalties should be avoided if an instalment plan is in place and is stuck to (or varied by agreement with HMRC).

CanI reduce my payments on account for 2020/21?

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. For more details on reducing payments on account if you are self-employed, see our guidance on payments on account. 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.

By way of example, Jill is a self-employed beautician. She prepares her accounts to 31 March each year. This is her only source of income. Her accounts for the year to 31 March 2020 showed a profit of £18,000. Between 23 March 2020 and the end of December 2020, she has only worked for three months but she hopes to be able to continue working up to 31 March 2021, depending on the extent of coronavirus restrictions. Jill estimates that her profits for the six months she thinks she will work this year will be at most £9,000.

However, Jill received two grants under the Self Employed Income Support Scheme, a payment of £3,000 in June 2020 and a payment of £2,625 in August 2020. Therefore when Jill considers how much her payments on account for 2020/21 should be and whether she can reduce them, she must base her calculations on taxable income for 2020/21 of £14,625 (ie £9,000 + £3,000 + £2,625) and not just the £9,000.

What if I can’t use HMRC’s online payment plan tool?

If you can’t use HMRC’s online payment plan tool, you can still contact HMRC to discuss setting up a payment plan.

This can be done either via HMRC’s Self Assessment payment helpline (0300 200 3822) or their coronavirus helpline (0800 024 1222).

If you are asking to spread your payments over more than 12 months, HMRC are likely to need more information such as details of current income and expenses before agreeing to a longer payment period.

What if I am receiving tax credits or universal credit?

If you receive tax credits, universal credit or other means-tested benefits and have a tax bill to pay in January 2021 and you can show that you don’t have any spare income to afford an instalment arrangement, contact HMRC (see question above for helpline details) and explain your situation to them. HMRC might agree that you do not need to make any payments towards the tax bill in the short term.

It is likely you will be asked to keep HMRC regularly updated as to your financial position (for example, calling them every three months) so the situation can be kept under review. If your income position changes and you are no longer in receipt of benefits, HMRC will expect an instalment arrangement to be put in place.

Where can I find help if I am having trouble completing my 2019/20 self assessment tax return?

If you are struggling to fill in your Self Assessment tax return, read our guidance suggesting where you can get help.

If you are self-employed you may find our booklet Self Employment: A LITRG guide helpful.

Do I need to complete a tax return? ▶