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Payments On Account in July

I am a sole trader and have received the demand for my July 2009 payment on account. My business was affected by the recession in the first 3 months of the year, and it is likely that my profits will have fallen in the year to 5th April 2009.  Can I reduce this payment?

Payments on account represent 50% of the individual’s net tax liability for the previous year. All individuals are liable to make these payments unless their net tax liability is less than £500, or more than 80% of the tax due was deducted at source. From January 2010 HMRC are proposing to increase this £500 limit to £1,000.

Given that your income is likely to be significantly less than the previous year on which the payments on account are based, you can claim to reduce these payments. The amount that you reduce these to should reflect your estimation of your tax liability for the following year, so in your situation it is the figures on your 2008/09 tax return.

However, be aware that if it is later found that you have overestimated the fall in your income, and consequently reduce the payments on account by too much, you will be liable to pay interest on the difference between the amounts paid as payments on account and the amount due. Equally if you have underestimated the fall, you will be due a refund and will receive an interest supplement.

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