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Self-employed people who pre-pay their tax in instalments twice a year could face unexpectedly higher bills if they pay late this year, due to a record increase in the cost of late payment interest.
Many of the UK’s 4.4m freelance workers pre-pay income tax bills in instalments twice a year, in amounts based on their previous year’s earnings.
The first of the so-called “payments on account” falls due on January 31 each year. The second is on July 31.
However, tax experts have warned that if people miss the July 31 deadline this year, they will face late payment interest costs of 7.5 per cent, up from 5.5 per cent at the beginning of the year.
Dawn Register, head of tax dispute resolution at accountancy firm BDO, said: “With many people struggling with higher living costs, some may be tempted to underpay their payment on account.
“But taxpayers should be aware that doing so will mean a 7.5 per cent late payment interest rate being applied to all outstanding monies owed. This is the highest rate we’ve seen for 15 years, and the unwary may be alarmed at how quickly this charge can ramp up your debt.”
She said taxpayers may have become used to paying modest interest rates on late payments in the past and so may not be aware of the steep change in HM Revenue & Customs’ interest rate, warning the current rate would come as a “real shock” to many.
The government charges a penalty of 2.5 percentage points above the Bank of England base rate for any late payment of tax bills. As the base rate has risen from 0.1 per cent in December 2021 to hit 5 per cent last month, taxpayers now face a 7.5 per cent interest rate on any late payments.
“There is always the possibility that this will rise even further,” Register warned.
Mike Hodges, partner at Saffery Champness, an accountancy firm, said: “The taxman thinks that people are thinking about nothing other than their taxes. But the reality is that people are focusing hard on earning a living and may miss the [July 31] deadline.”
Experts said checking whether a payment was required was not just advisable for the self-employed. Stefanie Tremain, a partner at accountancy firm Blick Rothenberg, said some may not be aware they needed to make a payment on account, including those with high levels of investment income from banks or dividends, and landlords.
Anyone experiencing financial difficulties should contact HM Revenue & Customs to discuss a longer-term payment plan, Tremain added.
Self-assessment taxpayers must make the two annual payments on account unless their last tax bill was less than £1,000 or they paid more than 80 per cent of the previous year’s tax owed.
Each payment is half the previous year’s tax bill, with payments due by midnight on January 31 and July 31. If there is still tax to pay after the payments on account are made, there will be a balancing payment due by midnight on January 31 in the following year.
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