Being charged interest by HMRC for making too much last year
Discussion
I've just completed my FY15-16 tax return. I made more than I thought I would, and more than last year.
As a result, HMRC have reassessed upward what my mid year "on account" payment should have been in January (which I paid in full and on time) and have decided that the difference is late, and are charging me interest on that amount. Two days ago, before I submitted the return, I didn't owe anything, and now I have a charge overdue by 135 days and associated interest charges.
Is this a mistake, or is this really how it works? Do you get penalised for not knowing you would make more than you did last year and then charged interest when you submit your return for the year?
As a result, HMRC have reassessed upward what my mid year "on account" payment should have been in January (which I paid in full and on time) and have decided that the difference is late, and are charging me interest on that amount. Two days ago, before I submitted the return, I didn't owe anything, and now I have a charge overdue by 135 days and associated interest charges.
Is this a mistake, or is this really how it works? Do you get penalised for not knowing you would make more than you did last year and then charged interest when you submit your return for the year?
If there was an election to reduce the Payments on account and they are too low then yes you owe interest etc. If they were the automatically calculated 1/2 of prior year then no they shouldn't charge...
(it is a while since I've done this so rules may have changed. It al depends if you adjusted your POA)
(it is a while since I've done this so rules may have changed. It al depends if you adjusted your POA)
Bit rusty as it was a few years ago but I intentionally stepped down my hours and income at the end a a tax year thinking this would be a simple matter
It wasnt
HMRC still demanded payment on account from my 'old' income and then wouldnt release the excess I had to pay until the end of the next tax year so effectively took a large amount of cash from me for 6 months before giving it back
Grrrr
hole.Fish said:
If there was an election to reduce the Payments on account and they are too low then yes you owe interest etc. If they were the automatically calculated 1/2 of prior year then no they shouldn't charge...
(it is a while since I've done this so rules may have changed. It al depends if you adjusted your POA)
If that's the case, that may be it then. I reduced it, expecting a decrease in income for various reasons.(it is a while since I've done this so rules may have changed. It al depends if you adjusted your POA)
Thanks to all.
It's the application to reduce the Payments on Account that have caused this.
The 2015/16 Payments on Account would normally have been based on the 2014/15 liability.
You guessed, incorrectly, that your 2015/16 tax bill would be lower than your 2014/15 tax bill and therefore applied to have the 2015/16 payments on Account reduced.
If you had paid the original 2015/16 Payments on Account you would not have been charged any interest, even if the ACTUAL 2015/16 tax liability is higher. Any additional amounts due to clear the 2015/16 liability (called the "Balancing Payment) would be payable on 31 January 2017 and no interest would normally paid on this.
However, by reducing the Payments on Account incorrectly, you have triggered an interest charge based on what the Payment on Account was originally set at and the reduced Payment on Account you actually paid.
The 2015/16 Payments on Account would normally have been based on the 2014/15 liability.
You guessed, incorrectly, that your 2015/16 tax bill would be lower than your 2014/15 tax bill and therefore applied to have the 2015/16 payments on Account reduced.
If you had paid the original 2015/16 Payments on Account you would not have been charged any interest, even if the ACTUAL 2015/16 tax liability is higher. Any additional amounts due to clear the 2015/16 liability (called the "Balancing Payment) would be payable on 31 January 2017 and no interest would normally paid on this.
However, by reducing the Payments on Account incorrectly, you have triggered an interest charge based on what the Payment on Account was originally set at and the reduced Payment on Account you actually paid.
jeremydb9 said:
Yes it is. I have had more rows on this with them than a can recall.
It is fraud in my view.
How?It is fraud in my view.
He adjusted his POA down and ended up owing more than that.
If HMRC didn't charge interest and penalties for that sort of behaviour everyone could claim ZERO POA and just pay the following January, thus removing the entire point of POA!
Bennet said:
Thanks very much for confirming that.
If I'd realised that this would happen during the middle of the year, would I have been able to simply over pay my mid year payment on account to avoid the interest?
Thanks again.
This would reduce the interest charge, but interest would still be due from the date the payment on account was due until the date it was paid.If I'd realised that this would happen during the middle of the year, would I have been able to simply over pay my mid year payment on account to avoid the interest?
Thanks again.
What made the OP think that reducing the Payments on Account was the right thing to do?
And, if he had realised he had reduced them when he should not have done so, when did he realise this?
Even if a taxpayer applies to have the Payments on Account reduced, the Payments on Account can be bumped back up to their original amounts at any time.
The basic advice I always follow is that DON''T reduce Payments on Account UNLESS you are 99% certain that the following year's tax liabilities are definitely going to be lower.
And, if he had realised he had reduced them when he should not have done so, when did he realise this?
Even if a taxpayer applies to have the Payments on Account reduced, the Payments on Account can be bumped back up to their original amounts at any time.
The basic advice I always follow is that DON''T reduce Payments on Account UNLESS you are 99% certain that the following year's tax liabilities are definitely going to be lower.
Eric Mc said:
What made the OP think that reducing the Payments on Account was the right thing to do?
Very simply, I made X from formal employment* in the previous year and Y from self employment. At the beginning of the new tax year, I ceased formal employment so reduced my POA to reflect the lowered total for the year, and then I ended up making more out of self employment than I expected.I'm happy with the explanation I've been given.
I've only been self assessing for a short time. I think it would have been nice if the HMRC site had mentioned the possibility of this happening. Instead it just gives you a box to enter your adjusted POA figure with no warnings about the consequences.
The interest charge is low and I now know what to expect.
Many thanks.
- not quite sure what the correct word is here to mean "normal" employment as opposed to self employment
The tax return itself is way too small a document to contain and explain all the legislation behind the intricate and multiple tax rules that underlie UK taxation.
HMRC publishes THOUSANDS of pages of guidance to "assist" a taxpayer when they are completing their returns. If you have a problem understanding what you need to do - they expect you to check these guidance notes. They essentially expect that ordinary folk are 100% up to speed on all this legislation when completing their returns and it is therefore always the taxpayer's fault when they enter erroneous data or make inappropriate claims - such as claims to reduce Payment on Account.
I think that this is a completely unreasonable stance to take, but this is the legal position underlying Self Assessment - the taxpayer is supposed to know 100% what they are doing as they complete each box and tick each option or make each election.
HMRC publishes THOUSANDS of pages of guidance to "assist" a taxpayer when they are completing their returns. If you have a problem understanding what you need to do - they expect you to check these guidance notes. They essentially expect that ordinary folk are 100% up to speed on all this legislation when completing their returns and it is therefore always the taxpayer's fault when they enter erroneous data or make inappropriate claims - such as claims to reduce Payment on Account.
I think that this is a completely unreasonable stance to take, but this is the legal position underlying Self Assessment - the taxpayer is supposed to know 100% what they are doing as they complete each box and tick each option or make each election.
Bennet said:
not quite sure what the correct word is here to mean "normal" employment as opposed to self employment
Technically, there is no such thing as "Self Employment" - even though the term is used by HMRC. The ONLY type of employment that exists is genuine "employment". "Self Employment" is more accurately described as "Sole Trading".To be honest I think the whole tax on account thing is a pretty stupid idea. Where else can you expect to be paid for something you haven't done yet? I'd like to see my clients pay me for work I haven't done a year in advance. What if I get hit buy a bus on day 2? Yet another stupid rule to cover up the ineptness of a government department unable to balance it's books properly.
Guvernator said:
To be honest I think the whole tax on account thing is a pretty stupid idea. Where else can you expect to be paid for something you haven't done yet? I'd like to see my clients pay me for work I haven't done a year in advance. What if I get hit buy a bus on day 2? Yet another stupid rule to cover up the ineptness of a government department unable to balance it's books properly.
On PAYE you pay your tax every month.To let self employed people pay 10 months after they have been paid is hugely unfair.
(Remember you pay tax for the April-16 year in Jan-17.)
So you pay one half of the tax you might owe in January - i.e. 10 months into the year. So you should have a pretty good idea about how that year is going.
And by July you obviously know exactly what you owe from a year that finished 4 months before.
Frankly I think it is generous if anything.
And obviously it has absolutely nothing to do with balancing the books.
walm said:
On PAYE you pay your tax every month.
To let self employed people pay 10 months after they have been paid is hugely unfair.
(Remember you pay tax for the April-16 year in Jan-17.)
So you pay one half of the tax you might owe in January - i.e. 10 months into the year. So you should have a pretty good idea about how that year is going.
And by July you obviously know exactly what you owe from a year that finished 4 months before.
Frankly I think it is generous if anything.
And obviously it has absolutely nothing to do with balancing the books.
On PAYE your salary is decided before the start of the year so baring lots of overtime or a big bonus, you can pretty accurately predict what you are going to be earning each and every month. I agree that previously as a self employed you paid the tax too late, it should have been collected pretty soon after the end of the financial year IMO but I don't think the system they have come up with works that well either tbh.To let self employed people pay 10 months after they have been paid is hugely unfair.
(Remember you pay tax for the April-16 year in Jan-17.)
So you pay one half of the tax you might owe in January - i.e. 10 months into the year. So you should have a pretty good idea about how that year is going.
And by July you obviously know exactly what you owe from a year that finished 4 months before.
Frankly I think it is generous if anything.
And obviously it has absolutely nothing to do with balancing the books.
Why else have they introduced this system if it isn't to get some of the payment a bit earlier to balance the books for that financial year? I'm genuinely intrigued at why else you think they might have done it considering this was pretty much what was stated when they first introduced it.
Guvernator said:
Why else have they introduced this system if it isn't to get some of the payment a bit earlier to balance the books for that financial year? I'm genuinely intrigued at why else you think they might have done it considering this was pretty much what was stated when they first introduced it.
The advantage of getting the money +/- 4 months or whatever is absolutely tiny - because interest rates are so low.I don't think the government is running out of cash.
Sure it helps a little but it isn't the biggest deal, is it?
I thought it was more to do with not making self-employment too attractive vs. PAYE, because they would prefer everyone on PAYE.
In fairness, now you made me think about it, I might well be wrong!!
walm said:
The advantage of getting the money +/- 4 months or whatever is absolutely tiny - because interest rates are so low.
I don't think the government is running out of cash.
Sure it helps a little but it isn't the biggest deal, is it?
I thought it was more to do with not making self-employment too attractive vs. PAYE, because they would prefer everyone on PAYE.
In fairness, now you made me think about it, I might well be wrong!!
I'm pretty sure when it first got introduced I got forwarded on the official government spiel by my accountant and it basically amounted to because we think it's "fairer" and so that we can get the money in a more timely and controlled fashion rather than months after the end of the financial year which I took to mean better control of their cash flow.I don't think the government is running out of cash.
Sure it helps a little but it isn't the biggest deal, is it?
I thought it was more to do with not making self-employment too attractive vs. PAYE, because they would prefer everyone on PAYE.
In fairness, now you made me think about it, I might well be wrong!!
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