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Self-employed individuals who make semi-annual tax prepayments may face unexpectedly higher bills if they pay late this year. This is due to a significant increase in the cost of late payment interest, which has reached a record high.
The UK has approximately 4.4 million freelance workers who prepay income tax bills in two installments each year, based on their previous year’s earnings.
The first installment, known as “payment on account,” is due on January 31st, with the second installment due on July 31st.
Tax experts have raised concerns that missing the July 31st deadline this year would result in late payment interest costs of 7.5%, up from the previous rate of 5.5% at the beginning of the year.
Dawn Register, head of tax dispute resolution at BDO accountancy firm, cautioned that some individuals might be tempted to underpay their payment on account due to financial challenges. However, she emphasized that this would lead to a 7.5% late payment interest rate being applied to all outstanding amounts owed, which is the highest rate in 15 years. Register highlighted the potential shock of rapidly accumulating debt caused by this charge.
Register further noted that many taxpayers may be unaware of the steep increase in HM Revenue & Customs’ interest rate, as they had grown accustomed to modest rates in the past. She stated that the current rate would come as a “real shock” to many individuals.
The government imposes a penalty of 2.5 percentage points above the Bank of England base rate for late payment of tax bills. With the base rate rising from 0.1% in December 2021 to 5% last month, taxpayers now face a 7.5% interest rate on overdue payments.
“There is always the possibility that this will rise even further,” warned Register.
Mike Hodges, a partner at Saffery Champness accountancy firm, acknowledged that people are primarily focused on earning a livelihood and might overlook the July 31st deadline. He suggested that the tax authorities should consider this when enforcing deadlines.
Experts emphasized that it is essential for not only the self-employed but also others, including individuals with significant investment income or those receiving dividends and landlords, to check if a payment on account is required.
Stefanie Tremain, a partner at Blick Rothenberg accountancy firm, encouraged those facing financial difficulties to contact HM Revenue & Customs and discuss the possibility of a long-term payment plan.
Self-assessment taxpayers must make two payments on account each year, unless their last tax bill was below £1,000 or they paid over 80% of the previous year’s tax owed.
Each payment is equal to half of the previous year’s tax bill and must be made by midnight on January 31st and July 31st. If there is still outstanding tax to be paid after the payments on account, a balancing payment must be made by midnight on January 31st of the following year.
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