Introduction

Every year, individuals and self-employed professionals in the UK face the task of paying their self-assessment tax. While this responsibility can be daunting, especially for those with variable incomes, the good news is that you may be able to pay your self-assessment tax in instalments. In this article, we will explore the options available for spreading the burden of self-assessment tax payments over time, ensuring that you can manage your financial obligations more effectively.

Understanding Self-Assessment Tax

Before delving into the details of paying self-assessment tax in instalments, it's important to understand what self-assessment tax is and why it's necessary.

Self-assessment tax is the method by which HM Revenue and Customs (HMRC) collects income tax from individuals and self-employed individuals who have income that isn't taxed through Pay As You Earn (PAYE). This includes income from self-employment, rental properties, investments, and other sources.

The self-assessment process requires individuals to report their income and gains, claim relevant deductions and allowances, and calculate the tax they owe. Once the tax liability is determined, it must be paid to HMRC by the deadline, which is typically January 31st following the end of the tax year.

The Need for Instalment Payments

Many taxpayers find themselves in situations where they are unable to pay their entire self-assessment tax bill by the January 31st deadline. This can happen for various reasons, such as irregular income, unexpected expenses, or financial difficulties. Fortunately, HMRC recognizes these challenges and offers options for taxpayers to pay their tax bills in instalments.

Options for Paying in Instalments

Payment on Account: One way to ease the burden of self-assessment tax payments is through the Payment on Account system. When you submit your tax return and calculate your tax liability, HMRC may require you to make two payments on account for the upcoming tax year. These payments are typically due on January 31st and July 31st.

Payment on Account is based on your previous year's tax bill. Each payment is usually half of your previous year's tax liability. While this can provide some relief, it's important to note that it doesn't reduce the total amount of tax you owe. Instead, it spreads the payments over two instalments.

Paying Self Assessment Tax in Instalments

While the default payment method for Self Assessment tax is a single lump-sum payment by January 31st, there are options available for individuals who may struggle to make such payments. HMRC recognizes that some taxpayers may face financial difficulties, and they offer several methods to help individuals pay their tax in instalments. Here are some of the options:

Time to Pay Arrangement:

A Time to Pay (TTP) arrangement is a formal agreement with HMRC that allows you to pay your Self Assessment tax bill in monthly instalments. To request a TTP arrangement, you must contact HMRC as soon as possible, ideally before the payment deadline. HMRC will assess your financial situation and may grant you additional time to pay your tax.

Payment Plan:

HMRC offers an online payment plan service, which allows you to set up a Direct Debit and pay your Self Assessment tax in monthly instalments. You can use this service if you owe up to £30,000 in tax, including any penalties or interest. Keep in mind that you should apply for a payment plan before the payment deadline.

Budget Payment Plan:

If you want to make regular payments throughout the year to cover your future tax bill, you can set up a Budget Payment Plan with HMRC. This plan calculates your estimated tax liability and divides it into manageable monthly payments, helping you avoid the financial strain of a large lump-sum payment.

Eligibility for Instalment Plans

Not everyone is automatically eligible for paying their Self Assessment tax in instalments. HMRC evaluates each request on a case-by-case basis, taking into account your individual circumstances. To be considered for an instalment plan, you should:

Demonstrate Financial Hardship:

HMRC will want to see that you genuinely cannot afford to pay your tax bill in full by the due date. You may need to provide evidence of your financial situation, such as income and expenditure details.

Act Promptly:

It's crucial to contact HMRC as soon as you realize you may have difficulty making the payment. The sooner you request an instalment plan, the more likely HMRC is to consider your request favorably.

Commit to Future Payments:

If you are granted an instalment plan, you must commit to making regular payments on time. Failure to do so could result in penalties and interest charges.

Not Have Outstanding Taxes from Previous Years:

You may not be eligible for an instalment plan if you have any outstanding tax debts from previous years. It's essential to address any prior tax arrears before requesting a new instalment plan.

Time to Pay Arrangement: 

If you find yourself unable to pay your self-assessment tax bill in full or in part, you can request a Time to Pay (TTP) arrangement from HMRC. A TTP arrangement allows you to make monthly instalment payments over an agreed-upon period.

To request a TTP arrangement, you must contact HMRC's Payment Support Service as soon as possible. They will assess your financial situation and determine whether you are eligible for a TTP arrangement. If approved, you will receive a payment schedule outlining the monthly instalment amounts and the duration of the arrangement.

It's essential to be honest and transparent about your financial situation when requesting a TTP arrangement. HMRC will consider your ability to pay and may ask for supporting documents to assess your circumstances.

Budget Payment Plan: 

HMRC also offers a Budget Payment Plan for individuals who want to spread their self-assessment tax payments evenly throughout the year. This option can help you avoid the stress of making lump-sum payments on specific due dates.

With a Budget Payment Plan, you calculate your expected self-assessment tax liability for the upcoming tax year and divide it by 12 to determine your monthly payment amount. You then make these monthly payments to HMRC throughout the year, helping you budget for your tax obligations more effectively.

It's important to note that with this option, you must stay ahead of your payments to avoid falling behind. HMRC may adjust your payment amount if your circumstances change during the year.

Conclusion

Paying self-assessment tax in instalments is a practical solution for individuals and self-employed professionals who face challenges in meeting their tax obligations by the January 31st deadline. Whether you opt for a Payment on Account, a Time to Pay arrangement, or a Budget Payment Plan, these options can provide much-needed flexibility in managing your tax payments.

However, it's crucial to remember that while these instalment options can make the process more manageable, they don't reduce your overall tax liability. You are still responsible for paying the full amount of tax you owe. Additionally, failing to pay your self-assessment tax on time can result in penalties and interest charges, so it's essential to communicate with HMRC and explore instalment options if you anticipate difficulties in meeting your tax obligations.

To ensure a smooth and stress-free self-assessment tax process, it's advisable to plan ahead, keep accurate financial records, and seek professional advice when needed. By doing so, you can effectively manage your tax payments and stay in compliance with HMRC regulations, ultimately securing your financial well-being.