Don`t pay too much tax in July

For those of us who have to prepare a Self Assessment Tax Return the 31st July is a date in our diaries that we fear as much as the dreaded 31st January.

On the 31st July we will be making an additional payment to HM Revenue & Customs against our estimated tax liability for the tax year ended 5th April 2010.

However, when we submitted our tax return on or before the 31st January 2010, we did not know what our tax liability was going to be for the 2009/10 tax year so HMRC assume that it will match your 2008/09 tax liability and ask you to make two equal payments on 31st January and 31st July in order to settle your liability in full.
So what happens if you tax liability is higher, easy you pay what is called a balancing payment on the following 31st January 2011 together with the first payment on account for 2010/11, and so the cycle goes round.

But and there is always a but, your taxable income has dropped in the year ended 5th April 2010. Maybe you are struggling to get funds together to pay your Second Payment on Account.

Don`t worry, you can always apply to reduce your payments on account to even as low as £Nil, the down side is that if you over reduce them and there is in fact tax due HMRC will charge you interest on the shortfall.

The best thing to do is to prepare your 2009/10 Tax Return as early as possible before 31st July 2010, by doing this you will be able to confirm your tax liability and therefore establish if you can reduce your Payments on Account and by how much without any fear of suffering interest charges on an inaccurate claim.

Also in my experience the summer months are always a good time to send your book and records to your accountant as this allows him sufficient time to ensure your return is correct instead of attempting to beat the deadline date of 31st January 2011.