What Should I Do if I Can't Pay my Self Assessment Tax Bill?
As a Director, it's likely that you'll have to register for self assessment with HMRC. This on top of running a business can be stressful; but what happens when the deadline comes around for paying your self assessment tax bill and you find you haven't got the funds available?
This can lead to you feeling even more stressed, but try not to panic too much because there are options available out there to help you.
Use Tax Reliefs
Most self-employed people do not think about using tax reliefs and allowances that are available to them, but there's no reason not to use them. But what are they? According to Investopedia
Tax relief is any program or incentive that reduces the amount of tax owed by an individual or business entity. Examples of tax relief include the allowable deduction for pension contributions, and temporary incentives such as tax credits for the purchase of new high-efficiency heating and cooling equipment.. However, most business owners either do not know about them or can forget about they exist.
The most well known tax relief is the personal allowance - the amount of money you can make before paying tax. This is currently set at £11,500 but it does tend to increase a little either every year or every two years. This means you don't pay tax until you reach this threshold, although national insurance payment requirements have a lower threshold.
Take a look at your outgoing expenses relating to the business. Is there something in your personal life that you use for the business? For example, your phone. Let's say you use your phone 50% for the business and 50% for personal use. The 50% that is used for the business can be put down as a business expense and then used as a relief against your tax bill, however, you will need to be able to show why the expense is allowable. An accountant can often help with advice on these matters.
Offer a Payment Proposal
Once you've looked at all the different tax reliefs available and you are still unable to pay the tax bill, then don't ignore it and hope it will go away. HMRC will add interest and fines to the account, making the bill even higher. The fines start at £100 for payments made up to 3 months late and will rise higher with the more time that passes.
So if you are unable to pay right away, the best course of action is to approach HMRC with a payment proposal. You will need to produce evidence of income and expenditure so that HMRC can consider what you are proposing. They are legally obliged to consider the proposal but there is no obligation that they have to accept it. They may ask about any personal savings you have which could cover the amount.
Also, consider the reason why you can't currently afford to pay. It could be because a client is paying later than usual, if you are expecting this payment to come through soon then explain this to HMRC and they may allow you additional time to pay.
If you do make an agreement then remember to stick to it, or get in touch immediately if you cannot. Otherwise, they are within their rights to start legal proceedings against you.
Paying by Account
Once you are coping with the situation there is a way to ensure that it doesn't happen again next year. This is by paying on account. This means your tax bill is split into 2 payments - one is due January 31st and the other is due July 31st, each of these will be 50% of your tax bill.
A word of warning though. The payment will be based on your previous year's earnings. So, if you end up making more the following year, you may have to make an extra payment the following January when you make your next payment.
Also, if HMRC decides that you have artificially lowered your payments they can charge you interest on the difference between what you said you would earn and what you did actually earn.
Here are three ways that you can make your income tax bill more bearable, but remember HMRC can check in on your accounts so make sure that everything you do is above board. If you need advice on these matters your accountant or a financial advisor may be able to offer the most suitable advice.
All figures and information correct at time of writing. Please check relevant resources for up-to-date information.