Many taxpayers have seen their income fall over the last three months as they find themselves furloughed or their businesses temporarily closed and nobody knows for sure when things will return to 'normal', if they ever will. Your 2019/20 Tax Return declares the income received in the year to 5 April 2020 which was mostly prior to Covid-19 and the issues that this has brought for businesses and investments. Therefore you could find yourself with an unexpectedly large tax liability in six months' time without the ability to pay it. Completing your Tax Return now will let you know with certainty what tax will be due at the end of January and enable you to budget towards it.
HMRC are currently giving taxpayers who make payments on account the option to defer their July payment if they are finding things difficult financially. The payment will still be due at the end of January, although HMRC will not charge interest on the deferred amount. We would still suggest however that if you have the funds available, do make the payment at the end of July as it will lessen the amount due in January, when you will likely be due to pay a first payment on account for the current tax year. It is also possible to pay your tax liability in advance by monthly instalments which can be set up with HMRC in order to manage cash flow better. We would be happy to discuss your options as what's right for one person might not be right for others.
As you will be aware if you make payments on account these are based on the previous year's tax liability. So payments on account due in January and July 2020 are based on your 2018/19 tax liability. Therefore if you suspect that your income for 2019/20 to be less than in 2018/19 preparing your Tax Return now will confirm the position and allow you to reduce payments on account before the end of July, helping with cash flow.
If you are in fact due a tax repayment, completing your Tax Return early will enable that repayment to be issued to you at time when you most need it.
Whilst investors are seeing less income from their investments in the current tax year this presents an opportunity for other planning such as withdrawing from a pension to maximise their basic rate tax band rather than waiting until a time when they are back in the higher rate band. The sooner you plan the better.
Finally, no one likes completing their Tax Return, even if they use an agent and particularly in January which is already the most depressing month of the year. The sense of achievement of knowing that it is out of the way for another year and knowing what payments are due cannot be underestimated.
For further information, please contact Collette Kerr at collette.kerr@morton-fraser.com
