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Spreading your tax bill – budget payment plans
If you pay tax under self assessment, it can sometimes be difficult to ensure you have enough money to pay HMRC when the payment deadline arrives. It is often a good idea to put money aside regularly to pay your tax. Here we look at how HMRC budget payment plans work and how these can ease the stress of facing a large tax bill.
Self assessment tax payments
If you complete a self assessment tax return each year, your tax liability (which would include income tax, class 2 and class 4 National Insurance and student loan repayments) is usually due for payment by 31 January following the end of the tax year.
Payments on account
If the amount payable is more than £1,000 (excluding student loan repayments and Class 2 National insurance) you might also need to make payments on account towards the following year’s tax bill, payable on 31 January during the tax year and 31 July following the end of the tax year.
These payments on account are then deducted from your final tax bill due the following 31 January, at which point you may need to make a balancing payment.
If your payments on account were higher than your total tax liability, the resulting overpayment will either:
be set against your next payment on account, or
can be claimed as a repayment (if no further payments on account are due).
You can read more about payments on account on our guidance page Self Assessment – understanding the basics.
Although making payments on account can go some way to spreading your tax liability, finding the money to pay your tax can still sometimes feel like a hefty burden. If you are able to, it is therefore a good idea to put money aside regularly to ensure you can pay the bill when the payment deadline arrives. One way you can do this is by setting up a budget payment plan (also called ‘pay weekly or monthly’) with HMRC.
What is a budget payment plan?
A budget payment plan is a regular payment arrangement with HMRC towards your future tax bill. You can think of this as being similar to making a monthly direct debit payment towards your energy bills – the concept is broadly the same. With an HMRC budget payment plan, you get to choose how much you pay and how often.
Warning: This does not mean you get to choose how much tax you pay! It just means you get to choose how much money you want to put towards your tax liability. If the amount paid under the budget payment plan is less than your actual tax liability, then you will have to pay the remaining balance of any tax by the normal deadline.
Please note, HMRC do not pay interest on tax paid in advance of the due date under a budget payment plan.
Example - Marianne
Marianne’s only sources of income are her state pension and a small rental property. She usually has an income tax liability each year of around £800 under self assessment. She hasn’t yet prepared her tax return for 2022/23, but on 1 October 2023 she sets up a budget payment plan with HMRC. Marianne decides to pay £200 under the plan each month and hopes that this will cover her tax liability becoming due on 31 January 2024.
On 15 January 2024, Marianne completes and submits her tax return. Her tax liability is actually higher than in previous years – £1,050. Since Marianne’s tax liability is more than £1,000, she will also need to start making payments on account towards her 2023/24 tax liability – the first of which is also due on 31 January 2024 and in this case is 50% of the previous year’s liability. As a result, Marianne’s tax payment position on 31 January 2024 is as follows:
|2022/23 tax liability||1,050|
|2023/24 1st payment on account (£1,050 x 50%)||525|
|Total tax due 31 January 2024||1,575|
|Deduct: amount paid under the budget payment plan||-800|
|Balance due by 31 January 2024||775|
From 1 February, Marianne will need to look again at her budget payment plan. It is unlikely that she will want to continue paying £200 per month as this will most likely far exceed her future tax liability.
The next tax payment that Marianne will need to make will be her second payment on account of £525 which will be due by 31 July 2024. Therefore, let’s assume Marianne decides to pay £87.50 per month from 1 February onwards. By doing this, Marianne will have paid enough under the budget payment plan to cover her July payment on account (6 months (Feb-July) x 87.50 = £525). She then leaves the budget payment plan as it is and continues to make further payments of £87.50 a month until January 2025.
Marianne completes her 2023/24 tax return on 10 January 2025. This shows a tax liability of £1,200. As a result, Marianne’s tax payment position at 31 January 2025 is as follows:
|2023/24 tax liability||1,200|
|2024/25 1st payment on account (1,200 x 50%)||600|
|Total tax due 31 January 2025||1,800|
|Deduct: Payment on account (January 2024)||-525|
|Deduct: Payment on account (July 2024)||-525|
|Deduct: further amounts paid under the budget payment plan*||-525|
|Balance due by 31 January 2025||225|
* monthly payment of £87.50 from August 2024 until January 2025.
Can anyone set up a budget payment plan with HMRC?
HMRC say that that you need to meet the following criteria to be able to set up a budget payment plan:
You must be up to date with all self assessment payments; and
- You must not be under an existing time to pay arrangement.
HMRC have a tool that you can use to check if you are eligible to set up a budget payment plan.
Do I have to set up a budget payment plan?
No, using a budget payment plan is completely optional.
If you decide you do wish to enter a budget payment plan, we have some useful information about estimating your future tax bill on our website.
You would need to bear in mind that by putting money aside using a budget payment plan, you no longer have immediate access to the money. This might be a good thing as you might prefer to have the peace of mind that the money cannot be inadvertently spent – although you are able to request that any amounts paid under a budget payment plan are refunded to you ahead of the payment deadline if an unexpected need for the money arises. You can also get a refund of the amounts paid to HMRC under a budget payment plan if it turns out the amount paid is more than your actual tax liability.
Example - Jesse
Jesse started trading as a self-employed electrician in May 2021. In the 2021/22 tax year his tax liability was £800, which he paid by the payment deadline of 31 January 2023. Finding the money to pay his tax was a struggle – Jesse had previously paid tax as an employee through Pay As You Earn (PAYE) so had not been prepared for the tax bill that arose at the end of his first year of trading. Since his tax liability was less than £1,000, he was not required to make payments on account towards 2022/23.
Jesse wanted to avoid having to find such a large amount of money for his tax payment for the following year and decided he would rather put aside a regular amount of money towards this liability. On 1 March 2023, he set up a budget payment plan with HMRC, choosing to pay a weekly amount of £25 by direct debit.
Jesse completes and submits his 2022/23 tax return on 15 December 2023. His tax liability for 2022/23 is £950. Since 1 March 2023, Jesse has paid 41 weeks’ worth of £25 under his budget payment plan – so he has already paid £1,025 to HMRC. Jesse is therefore able to claim a refund of £75 from HMRC. Alternatively, Jesse could leave the credit on his account to be set against any future tax liability.
Going forward, Jesse can decide if he wants to change the amount he regularly pays under the budget payment plan – if business is picking up and he expects his liability to be higher next year, he might decide to increase the weekly amount.
Alternatively, Jesse might decide that he would rather save for the next tax bill by putting the money aside into his own personal savings account – his logic for this is that he might as well earn some interest on the money until it is time to pay the tax bill!
What if I can no longer afford my regular payments?
HMRC say that you can pause payments under your budget payment plan for up to six months if you need to. You can also simply cancel the arrangement at any time if it is no longer affordable. As already mentioned, making payments under a budget payment plan is completely optional.
But of course, it is important to remember that the tax liability itself is not optional - this will still be due by the normal payment date.
If you decide to cancel or pause any payments under a budget payment plan that you have previously set up, you will be faced with a larger tax payment when it comes to settling your tax liability at the deadline date.
I have missed a tax payment deadline – can I use a budget payment plan to catch up with my payments?
No, as mentioned above, budget payment plans are only used to pay future tax liabilities. If you are behind with your tax payments, then you will need to bring these up to date before entering into a budget payment plan. This includes being in a ‘time to pay’ arrangement – any time to pay arrangement must have come to an end before you are able to start a budget payment plan.
You may, however, instead be able to agree a time to pay arrangement with HMRC to help you catch up and then look at a budget payment plan in future. You can read more about late payment of tax and time to pay arrangements on our website.
How do I set up a budget payment plan?
You will need to have an online HMRC personal tax account (PTA) to set up a budget payment plan. You can read more about PTAs and how to set one up on our page Digital services: dealing with your tax and tax credits online.
When you access your PTA, you are presented with a series of links down the right-hand side of the screen. Click on the link that says ‘Direct Debit payments’. Follow the instructions for setting up the direct debit. Towards the end of the process you will be asked to confirm if you wish to make a single payment or a budget payment plan. You can then go on to confirm how much you want to pay and how regularly, and can also provide a start and end date for payments.
If you do not have access to your PTA, you can set up a budget payment plan over the telephone by calling HMRC’s self assessment payment helpline. You can find the contact number on GOV.UK.
Alternative options for spreading a tax liability
Setting the money aside in the bank
As mentioned in the example of Jesse above, you might prefer to simply put cash aside – for example, in a separate bank account. This could be more attractive as you might be able to earn some interest on the money. In addition, keeping the money aside in your own account means it could be available immediately if an unexpected financial need arises – though this would have to be balanced against the fact that the tax liability will still be due by the deadline.
Paying via your tax code
If you have a source of Pay As You Earn (PAYE) income, you might have the option to have any tax arising under self assessment collected via an adjustment to your following year’s tax code instead. This is usually possible if all of the following apply:
your total tax liability under self assessment is less than £3,000;
you pay tax on part of your income under PAYE (i.e. on employment or private pension income);
you submit your self assessment tax return by either 31 October (if filing on paper) or by 30 December (if filing online);
you have enough PAYE income to collect the tax liability; and
you would not pay more than 50% of your PAYE income in tax.
We understand that HMRC will automatically collect a self assessment liability through your following year’s PAYE tax code if you meet all of the above criteria unless you ask them not to.
Where this happens, the additional tax is collected by deducting a larger amount of tax from your PAYE income over the course of the following tax year, essentially spreading the burden of payment and meaning you do not need to pay the tax in a lump sum. You can read more about paying tax through your PAYE tax code on GOV.UK.
Contact: Antonia Stokes (click here to Contact Us)
First published: 14/09/23