Payments on account represent 50% of the individualís 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 the 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 which the payments on account are based on, you can claim to reduce these payments. The amount that you reduce these to should reflect your estimation of your tax liability for the next tax year.
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.
By Jo Nockels
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