If HMRC is your top search on Google this month, you’re not alone. You are also likely on the verge of paying more tax than necessary.
With the right advice, and a few timely steps, you can significantly reduce your January tax bill and avoid unnecessary stress.
(Read Time: Approx. 5 minutes)
Topics Discussed:
- Detailed insights into payments on account, amendments, nudge letters and penalties
- How to safeguard your tax position and reduce bills ahead of January deadlines
Understand Payments on Account and How They Work
One of the biggest reasons taxpayers get a large January tax bill is because of payments on account.
These are advance payments that go towards your next tax bill and your Class 4 National Insurance if you are self-employed.
Here are the key facts from HMRC and official guidance:
- Payments on account are based on what you owed in the previous tax year.
- HMRC estimates your current year’s tax bill by looking at last year’s tax liability and divides that estimate into two equal instalments.
- Each payment is 50 percent of last year’s tax bill, and they are due by 31 January and 31 July each year.
- You only need to make payments on account if your last Self-Assessment tax bill was more than £1,000 and you have not paid more than 80 percent of your tax at source.
- If you did not make payments on account last year, for example because this is your first Self-Assessment, you will be asked to pay the full amount of tax owed and your first payment on account at the same time.
If your income drops or you expect a lower tax bill for the coming year, you can apply to HMRC to reduce your payments on account on reasonable grounds.
If you reduce them too much and it turns out your liability was higher, HMRC may charge interest on the underpaid amount.
Payments on account are designed to spread the tax burden over the year and avoid one huge lump sum at the end of January, but the system is not always fair to people with variable or seasonal incomes.
Amendments on Tax Returns and How They Work
If your tax return has already been filed but contains omissions or errors, you can amend it. According to HMRC guidance:
- You can make a change to your Self-Assessment tax return within 12 months of the filing deadline.
- Once amended, HMRC will recalculate your tax position and update your bill accordingly. You will see how the change affects what you owe or any refund due.
- Amendments are often used to correct missed expenses, add overlooked allowances like home working relief, and claim deductions you were not aware of originally.
Making corrections proactively is usually better than waiting for HMRC to identify an issue, because voluntary amendments can reduce your outstanding tax and help avoid enforcement action later.
HMRC Nudge Letters and Recent Use of Them
Many taxpayers receiving rental income or making capital gains are surprised by an HMRC contact letter.
These are often nudge letters and they are becoming more common.
Here is what is known about them:
- HMRC nudge letters are designed to prompt taxpayers to check their tax affairs and correct any omissions before HMRC launches a full enquiry.
- The letters are not formal enquiries but often use data that HMRC has obtained, for example from property reporting or third parties, to warn you of potential undeclared income.
- These letters may be generic or tailored and can cover multiple taxpayers at once on the same issue.
- Receiving a nudge letter means HMRC has reason to believe there are undeclared liabilities, so acting early to disclose any income voluntarily can reduce penalties.
Official statistics on the exact number of nudge letters sent each year are not regularly published, but industry groups report that HMRC has increased their use significantly as part of its compliance strategy.
Penalties and Fines for Late Submissions and Payments
Failing to file your tax return or pay your tax by the relevant deadlines attracts automatic penalties and interest.
HMRC and official UK guidance outline the framework clearly.
Penalties for late submission:
- An initial penalty of £100 once the return is late, even if no tax is owed.
- After 3 months, daily penalties of £10 per day up to a maximum of £900.
- After 6 months, a further penalty of £300 or 5 percent of the tax owed if greater.
- After 12 months, an additional penalty of £300 or 5 percent of the tax owed again unless HMRC considers the taxpayer has deliberately withheld information.
Penalties for late payment:
- 5 percent of the unpaid tax if the payment is 30 days late.
- A further 5 percent at six months late.
- Another 5 percent at 12 months late.
Interest is charged on all late payments from the due date until the date you pay in full. The interest rate is currently set at a level determined by HMRC and applies daily.
If you have a genuine reason for missing a deadline you can appeal against penalties by providing a reasonable excuse, such as serious illness or system failures.
Summary
January does not have to be stressful, and a high tax bill is not inevitable.
With a clear understanding of payments on account, the ability to amend returns, the rise of HMRC nudge letters and the facts about penalties, you are in a much stronger position to act early and minimise your liabilities.
Please do not leave these matters until the deadline.
If you need help reviewing your situation, correcting returns or dealing with HMRC correspondence, get in touch with us at Tax Expert.
We can help you reduce your tax bill, avoid fines and approach HMRC with confidence.
Fill out our form here for any questions, email us at info@taxexpert.co.uk, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel
