Act now: how to cut your July tax bill
If you’re in self-assessment, the second payment on account for the 2015/16 tax year is due this Sunday 31 July.
However, due to a ‘bonus’ pension allowance which was available for 2015/16 only, coupled with an impending cut in the annual pension allowance for higher earners, thousands of people in self-assessment may be able to reduce their tax bill due at the end of this week.
The rules and how this anomaly occurred are quite complex, so below we explain how and why you may be able to pay less tax.
The annual pension allowance
For most people, the annual allowance – the amount of money you can save every year into your pension tax-free – is £40,000.
But in the Summer Budget of 2015, the government announced it would align the Pension Input Period (PIP) – which could be any period of time chosen by the pension saver – with the tax year.
In a bid to ensure savers weren’t adversely affected by the change – for instance only having six months to contribute the full £40,000 rather than a year – it introduced an additional £40,000 allowance. This meant individuals could potentially contribute £80,000 into their pension in the 2015/16 tax year.
This, coupled with the introduction of the Tapered Annual Allowance on 6 April 2016 which cut the annual pension allowance by £1 for every £2 of income above £150,000 meant many higher (40%) and additional (45%) tax payers pumped money into pension schemes to take advantage of the benefits and reliefs.
Tina Riches, national tax partner at Smith & Williamson, an accountancy and investment management group, said: “Typically, the July tax payment is based on your previous year’s self-assessment tax bill and so half of the previous year’s tax payment should normally be made by 31 July as your payment on account.
“However, if you are one of the thousands of people who made a larger pension contribution in 2015/16 than you did in 2014/15, then you may be able to reduce your July tax payment.”
In most cases, you will automatically get basic tax relief at 20% from the claim made by the pension scheme administrator but if you are a 40% or 45% taxpayer, you actively have to claim the additional 20% or 25% relief.
As an example, if you paid in an extra £10,000 (£8,000 payment with £2,000 basic rate tax credit) and you pay tax at 40%, you could be eligible for an extra £2,000 tax relief on that pension contribution. This could potentially cut your tax bill for 2015/16 by that amount.
She added that your total tax bill for 2015/16 will depend on your total income from all sources, minus any deductions and allowances, but if you are self-employed and earned less in 2015/16 than you did in the previous year, you may also be eligible to make a reduced July tax payment.
How to reduce the 31 July tax payment on account
If you think your income tax and Class 2 and 4 National Insurance contribution bill should be lower in 2015/16, than for 2014/15, you should contact HMRC as soon as possible to claim reduced payments on account.
Doing this before Sunday 31 July can reduce your July payment on account by the full anticipated reduction as there could be an overpayment from the first payment on account made at the end of January.