Let’s explain by way of an example:
Sarah started to let a property in September 2016 for £15,000 with allowable expenses of £3,000 per annum. She has other income which uses her personal allowance so the income will all be taxed at the higher rate (currently 40%). She has not had to complete a self assessment tax return before.
Before 5th October 2017
She must inform HMRC that she has a source of untaxed income within six months of the end of the relevant tax year. As Sarah’s rental income profits are first received in the tax year ending on 5th April 2017 she must notify no later than 5th October 2017. HMRC have produced form SA1 to enable taxpayers to notify that they have a liability which can be found on the Government website.
Before 31st October 2017 (optional)
If she wants to complete a paper tax return and/or HMRC to calculate her tax liability, the paper 2016/17 tax return must be filed by 31st October 2017. There is a £100 penalty if the paper return is filed after this date.
Before 31st December 2017 (optional)
If Sarah’s liability is less than £3,000 and she wants the liability to be included in her PAYE code for 2018/19 (see below), she must either have filed a paper return by 31st October 2017 or filed an electronic return before 30th December 2017.
Before 31st January 2018
If she has not filed a paper tax return by 31st October 2017, she must file a tax return electronically by 31st January 2018 or she will be liable to a penalty of £100. (See "What if you are late?" below). There are certain individuals (e.g. politically sensitive individuals) who are not allowed to file electronically so they may have to file a paper return by this date instead.
Assuming that the income carries on at the same rate until at least 5th April 2016, her liabilities will be:
Tax Year Tax due
2016/17 £2,800 (Profits to 05/04/17 7,000 @ 40%)
2017/18 £4,800 (Annual Profits of 12,000 @ 40%)
Is Sarah employed?
If Sarah is employed, she will be paying income tax under Pay As You Earn (PAYE). HMRC do try to include estimates for rental income in PAYE codes which means that the tax can be collected up to two years earlier than necessary. We therefore advise that you do not ask HMRC to have an estimate included in your code.
Sarah’s tax liability for 2016/17 will be £2,800 and provided her 2017 self assessment tax return is filed before 30th December 2017, this liability can be included in her code for 2018/19 as it is less than £3,000. This means that the liability would be collected in instalments in the year ended 5th April 2019 rather than the year ended 5th April 2017 if HMRC had included an estimate of the income in the 2016/17 PAYE code.
If the self assessment liability for any tax year is more than £3,000, it cannot be included in the PAYE code. So Sarah would not be able to have her liability for 2017/18 of £4,800 included in her code for 2019/20. Therefore, she would have a liability of £7,200 to pay on 31st January 2019 in the same year as the £2,800 for 2016/17 was being collected through her code (see below). It is therefore important that cash is kept to one side for any liabilities.
If Sarah is not employed or she has a liability of more than £3,000:
If the net liability is less than £1,000 or 20% of the total tax and Class 4 national insurance before any tax deducted is taken into account, then the liabilities are due on 31st January following the end of the tax year and there are no payments on account. So Sarah would have to pay £2,800 on 31st January 2018 and £4,800 on 31st January 2019 if she met the 20% criteria.
If neither condition is met, payments on account are due for the following tax year of half of the previous year’s income tax and Class 4 NIC liability on 31st January in the following tax year and another half six months later on 31st July. If the liability of the following year increases then the balance is due on the following 31st January and the payments on account increase for the next year.
If the liability for the following year decreases, then there would be a repayment of the difference and the payments on account reduce for the next year. A claim can be made to reduce the payments on account if a reduction in the liability is expected, for instance if the rental income had ceased. If the payments are reduced by too much, there is an interest charge on the over claim. In the first year in which payments on account are due, there is effectively a payment of one and a half years tax at once. This is best shown using Sarah’s liabilities as an illustration:
|Date Due||Tax Year||Tax Liability|
(2016/17 in PAYE Code)
|2016/17 Total Liability||2,800||-|
|2017/18 1st POA (1/2 x 2,800)||1,400||-|
|31st January 2018||4,200||-|
|2017/18 2nd POA (1/2 x 2,800)||1,400||-|
|31st July 2018||1,400||-|
|2017/18 balance (4800 - (2 x 1400)||2,000||4,800|
|2018/19 1st POA (1/2 x 4,800)||2,400||2,400|
|31st January 2019||4,400||7.200|
|2018/19 2nd POA (1/2 x 4,800)||2,400||2,400|
|31st July 2019||2,400||2,400|
If Sarah’s income and tax liability was to stay the same then her payments would remain at £2,400 on 31st January and 31st July each year thereafter because the payments on account would match the liability. This is unlikely in practice, but if the income levels are similar each year, the payments in January and July are likely to be similar after the first three years.
Capital Gains Tax
If there is a Capital Gains Tax liability, it is added to the income tax liability and is due on 31st January following the end of the year of assessment. It is not taken into account when calculating the payments on account and does not need to be taken into account when considering whether to reduce the payments on account in any tax year.
There is an automatic non-refundable penalty of £100 if the return is not filed by the due date (usually 31st January following the end of the tax year). If there is reasonable excuse, the penalties will be waived.
If the return is more than three months overdue, there is a penalty of £10 for each further day that the return is late up to a maximum of 90 days.
If the return is more than six months late there will be a further penalty of £300 or 5% of the liability if this is higher.
If the return is filed more than twelve months after the filing deadline (i.e. 31st January 22 months after the end of the tax year) there will be a further penalty of £300 or 5% of the liability if this is higher in addition to the penalty due for the previous 31st July. In serious cases the penalty may be up to 100% of the tax due.
If you do not pay on time, interest runs on any amount paid late. There is also a 5% penalty if the liability for the previous tax year is not paid by 30 days after 31st January following that tax year and a further 5% penalty if it is not paid by the 31st July after that. If the tax is not paid by the following 31st January then there will be a third 5% penalty.
Try to make an arrangement with HMRC. There is currently a Business Payment Support Service Helpline Tel No: 0300 200 3835.
© Thandi Nicholls Ltd 2017 All Rights Reserved - The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk, K Nicholls FCA or S Thandi cannot be held responsible for the consequences of any action or the consequences of deciding not to act.
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