Spreading the cost of tax through pay arrangements with HMRC

Tax payments for the self-employed or those who declare their income under self-assessment are payable by 31 January and 31 July every year. Taxpayers who cannot pay by those dates have the opportunity to pay via HMRC's 'Time to Pay' scheme whereby HMRC agrees to a payment plan for unpaid tax spread over a longer period than would otherwise be available. 

Many taxpayers are unaware that there is another method of paying HMRC in instalments, the difference being that only those taxpayers whose payments and returns are up to date can take advantage. 

A budget payment plan (BPP) allows taxpayers to make regular advance payments towards their next self-assessment tax bill. Taxpayers can set up and manage their own BPP using their HMRC online account. An important element of the scheme is flexibility – the taxpayer decides the regular weekly or monthly amount (which can be amended as desired), choose to suspend payment for up to six months and cancel at any time. Taxpayers whose income fluctuates from year to year may find the plan beneficial, as their tax payments can be based on current in-year income.

A condition for payment via this method is that any balance owing (after subtracting the payment plan payments) must be paid by the due date. The 'downside' of such a payment method is that HMRC does not give interest on such 'overpayments'. 

Other payment plans

Rather than paying under a formal agreement, taxpayers can pay an amount to their tax accounts when they have spare cash, and this has the potential to build up funds held by HMRC to pay the next tax payment when due. No formal arrangement is required, no set payment plan is needed but, again, no interest is credited. However, the concern here is that in some instances HMRC views such a payment as an overpayment and may return the monies, not least if it has the taxpayer's bank account details.

The traditional idea of putting money aside in a building society or bank to pay tax and earning some interest does not necessarily work for some taxpayers for several reasons, not least that it is difficult for some people to set aside the money due, and so payments in advance may be preferable. However, if the taxpayer can deposit in an interest-bearing bank account, interest of approximately 4% could be achieved. 

Whichever payment method is chosen, it must be remembered that HMRC charges interest on late payments – as from 31 May 2023, HMRC has revised interest rates with late payment bills charged at 7% – double the percentage a year ago.

Interaction with Universal Credit 

Regular payments to HMRC whether by formal arrangement or on an ad hoc basis can be beneficial for small sole traders also in receipt of Universal Credit (UC), as tax payments are a deduction against income for UC purposes. That way the claimant could end up with slightly more UC each month rather than one month with a larger increase (which is likely to be less than the cumulative extra when paying monthly due to the minimum income level).

Future for BPP 

In the 2021 Budget the government announced investment in HMRC systems to improve the existing BPP to make it easier for taxpayers to use the system. HMRC believes that regular payments towards tax bills aid both HMRC's and the taxpayer's cash flow, reducing the costs involved in charging interest for late payment of tax and the cost of collecting unpaid tax. The extra investment was aimed at 'raising the Budget Payment Plans prominence online making it easier for customers to find and sign up' as well as 'increasing payment flexibility'.

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