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How to Set Up an HMRC Payment Plan for Self-Assessment Income Tax

As the deadline for 2022/23 self-assessment tax returns and payments draws closer, you must take pre-emptive action if you cannot pay your obligations on time. HMRC normally issues a reminder letter initially if your tax return or payment is not received by 31st January.

However, if you haven't made a payment, set up an instalment schedule or contacted the tax office, you will start to accumulate late filing penalties and interest charges and potentially attract further investigation. In the worst case scenarios, HMRC may send a tax inspector to visit your home or workplace or instruct a debt collection agency to operate on its behalf.

For most taxpayers, there is the option of setting up a payment plan online, and it is advisable to do so promptly rather than waiting for a reminder notice. Late payment interest accrues from the first day over the deadline.

Setting Up a Payment Plan With HMRC

If you can't pay the full amount of tax owed on time, you can normally create a payment plan called Time to Pay. Note that this isn't universally available, and if you select this option online, you may see a screen that indicates you are not permitted to proceed – in which case you should contact HMRC as soon as possible.

The tax office will only accept payment plans provided:

  • You have filed your tax returns up to date – you can set up a Time to Pay arrangement as soon as your tax return has been received and is showing on your online tax account.

  • The amount owing is £30,000 or less.

  • You request a payment plan within 60 days of the payment due date.

  • There are no other ongoing payment plans or overdue taxes owing to HMRC.

Businesses can also request payment plans for PAYE contributions and VAT owed, but again, there are limitations. In some scenarios, HMRC will not accept a payment plan; in others, it will require you to utilise savings towards your tax bill if you have cash assets available that could cover the full amount.

Employers can request payment plans for PAYE and VAT obligations of £50,000 or less, provided they comply with the eligibility requirements. Similarly to self-assessment income taxpayers, these include being up to date with returns and not having other payment plans.

Information Required to Set Up an Income Tax Time to Pay Agreement

When you apply for a payment plan online, you'll need to answer a series of questions and provide all the requested details. These include your Unique Tax Reference number (UTR), the details of the bank account you intend to make payments from, and the information about missed payments.

Otherwise, you should ring HMRC, where a tax official will often ask why you cannot pay in full and how much you believe you can pay each month going forward.

If there are any exceptional circumstances such as redundancy, ill health or bereavement, you should inform HMRC – the tax office is often more sympathetic if there is a reason outside of your control that has led to you being unable to pay your taxes on time.

What Payments Will HMRC Accept on a Time to Pay Agreement?

HMRC will assess your income, monthly outgoings, savings and investments. It uses this information to arrive at a monthly payment amount, normally based on half of your remaining income, based on your earnings, less accommodation, utility, grocery costs and any fixed monthly outgoings.

If the tax office doesn't think you will keep up with a payment schedule or can reasonably make other arrangements to bring your tax affairs up to date, it may refuse a payment plan request.

How Long Does an HMRC Payment Plan Run For?

Payment plans are designed to help those who cannot make their tax payments in full, and it is advisable to clear the debt as soon as possible. The longer it takes to pay, the more you will accrue interest charges, so a payment plan isn't a 'cheaper' solution.

The tax office may also require you to increase your repayments or pay your tax bill in full if your circumstances change, such as moving to a new job or receiving a higher salary.

Missing a payment on a pre-agreed schedule will prompt further action from HMRC. Usually, a tax official will contact you to find out why you have missed the payment and to revisit the agreement.

Advice on Setting Up an HMRC Payment Plan

Depending on your tax position and any previous requests to pay your tax liabilities in instalments, HMRC may expect you to contribute towards future tax obligations through the payment on account system.

As most self-employed taxpayers will know, the system requires you to make payments on account towards the anticipated tax arising in the current tax year, alongside settling the final balance owing on the previous tax period.

That could mean making monthly payments towards your previous tax charges, plus amounts on account to ensure you aren’t continually in arrears or won’t become overdue automatically when your next payment on account due date arrives on 31st July.

If you need advice about managing overdue taxes, submitting your self-assessment tax return or requesting a Time to Pay agreement, please get in touch with the SAS Accounting team anytime.