Tax administration for Individuals.

Okay, firstly, a charge to interest automatically arises on any tax paid late. So a charge to interest can arise in respect of

* any payment on account
* any balancing payment

For POA and balancing payments the interest arises on any sums outstanding from:

* the due date for payment – the date on which payment is finally made

For example, if a payment of £5,500 should have been made on 31st July 2010, but only £4,500 is paid on that date, interest accrues on the balance of £1,000 from 1st August 2010 until the date on which the outstanding payment is finally made.

Look at these situations (got them from HMRC website)

Interest on payments on account and balancing payments
A taxpayer’s self assessment for 2010-11 is £2,000. Therefore the payments on account for 2011-12 are

31st January 2012 £1,000
31st July 2012 £1,000

The self assessment for 2011/12 is £3,000 and any balancing payment is due on 31st January 2013.

Assume that

* the payment of £1,000 due on 31st January 2012 is not paid until 1st April 2012
* only £500 of the payment due on 31st July 2012 is paid at that date
* the balancing payment of £1,500 due on 31st January 2013 is not paid until 1st March 2013.

Section 86 interest arises on

* £1,000 for the two months 1st February 2012 to 31st March 2012
* £500 for the six months 1st August 2012 to 31st January 2013
* £1,500 for the month 1st February 2013 to 28th February 2013.

Interest charge following excessive claim to reduce payments
A taxpayer’s self assessment for 2010-11 is £4,000. Therefore the payments on account for 2011-12 are

31st January 2012 £2,000
31st July 2012 £2,000

On the basis of a profit forecast at 31 December 2011 the taxpayer makes a claim to reduce these payments to £1,000 each. The reduced payments are both made on time.

When the 2011-12 return is filed on 31st January 2013 the self assessment shows an income tax liability for 2011-12 of £3,750. The balancing payment of £1,750 is paid on 1st April 2013.

Section 86 interest arises on

* £875 for the 12 months 1st February 2012 to 31st January 2013
* £875 for the six months 1st August 2012 to 31st January 2013
* £1,750 for the two months 1st February 2013 to 31st March 2013.

If the income tax liability for 2011/12 had been £5,600, and a balancing payment of £3,600 was paid on 1 April 2013, then Section 86 interest would have been due on

* £1,000 for the 12 months 1st February 2012 to 31st January 2013 (£1,000 is the maximum on which interest can be charged as 50% of the relevant amount for the previous year is £2,000, of which £1,000 was paid on account)
* £1,000 for the six months 1st August 2012 to 31st January 2013
* £3,600 for the two months 1st February 2013 to 31st March 2013.

Hope this helps.

thanks.