As the cost of living crisis continues to bite, you may find that come 31 January 2025 you are struggling to pay your Self Assessment tax bill. If this is the case, it is important that you do not bury your head in the sand – the bill will not go away and, with the addition of interest and penalties, will become bigger. However, there are options available which may allow you to pay what you owe over a longer period.

Coding out

If you filed your 2023/24 tax return online by 30 December 2024 or filed a paper return before 31 October 2024 and you have PAYE income, if you owe £3,000 or less, HMRC will collect what you owe by adjusting your tax code for 2025/26. This effectively allows you to pay in interest-free instalments and is something of a good deal.

Time to Pay Arrangements

To spread the cost, you may be able to pay your bill in instalments by setting up a Time to Pay Arrangement with HMRC. You may be able to do this online if all of the following apply:

1. You have filed your 2023/24 tax return.
2. You owe £30,000 or less.
3. You are within 60 days of the 31 January deadline.
4. You do not have any other payment plans with HMRC.

You can do this by logging into your HMRC account.

If you are unable to set a plan up online, you may be able to do so by calling HMRC on 0300 200 3820. You will need to provide details of your income and outgoings.

Where an arrangement is set up, you will be charged interest on the tax paid after the due date. However, penalties are not applied. The arrangement is designed to be flexible and if you are able to you can clear it early to save interest. If you struggle to meet the repayments under the arrangement, the best course of action is to contact HMRC to try and renegotiate the agreement, for example to pay your tax over a longer period. If you fall behind or do not pay what you owe and do not agree a revised plan with HMRC, they may take action to recover what you owe.

HMRC currently charge interest at 2.5% above base. This is to increase to 4% above base from April 2025. If you are able to borrow money at a lower rate, it may be preferable to take out a loan to pay your tax than to use a Time to Pay Arrangement.

Budget Payment Plans

Looking ahead, you may find it easier to set aside some money to pay your tax bills. While you can simply have a separate bank account for this purpose, you may prefer instead to set up a Budget Payment Plan with HMRC so that you cannot dip into the account in the year. A Budget Payment Plan allows you to put money aside for your next Self Assessment bill by making regular weekly or monthly payments to HMRC. If the amount put aside is less than the amount you owe, the balance must be paid by the due date. If you have put aside more than you need, you can ask for a refund. You can pause payments for up to six months.

As long as your tax affairs are up to date, you can set up a Budget Payment Plan through your online HMRC account.

Review payments on account

If your 2023/24 tax and Class 4 NIC bill is more than £1,000 and you do not pay at least 80% of your tax through deduction at source, such as via PAYE, you will need to make payments on account of your 2024/25 tax liability. Each payment is 50% of your tax and Class 4 bill for 2023/24 and payments are due on 31 January 2025 and 31 July 2025. It is advisable to review your payments on account. If your income has fallen and you expect to owe less for 2024/25 than for 2023/24, you can opt to reduce your payments on account. However, if you reduce them too much, interest will be charged on the shortfall.

If you are self-employed, you will pay tax on your taxable profit. In working out your taxable profit, you can deduct certain expenses that you have incurred in running your business. The basic rule is that expenses can be deducted if they are incurred wholly and exclusively for the purposes of the trade.

This rule precludes a deduction for private expenditure. Where possible, it is advisable to use separate bank accounts for business and personal expenditure to keep them separate and reduce the risk of missing business expenses or deducting private expenses in error.

Where an expense has both a private and a personal element, it is permissible to claim a deduction for the business part, as long as the business expenditure and the private expenditure can be identified separately. This may be the case, for example, where a car is used for both business and personal travel. Here a deduction for business travel could be claimed using the simplified rates published by HMRC. However, where it is not possible to separate the business and personal costs and the expenditure has a dual purpose, a deduction is not permitted. An example of this would be everyday clothes worn for work, as even if the clothes are only worn for work, they also provide the personal benefits of warmth and decency.

If you use the cash basis, you can claim a deduction for revenue expenditure and also capital expenditure where it is of a type for which a deduction is allowed under the cash basis. However, if you use traditional accounting, you can only deduct revenue expenditure; relief for capital expenditure is given in the form of capital allowances.

Typical expenses

A business may incur some or all of the following expenses, which can be deducted in calculating its taxable profit, as long as the costs are incurred wholly and exclusively for the purposes of the business:

• Office costs, such as stationery and printing costs and phone bills
• Travel costs, such as fuel, train, taxi and bus fares, or parking
• Uniforms bearing the business’s logo or name (but not ordinary everyday clothing)
• Goods purchased for resale
• Raw materials
• Costs related to the business premises, such as rent, light and heat
• Insurance
• Advertising or marketing costs.

Trading allowance

Rather than claiming a deduction for your actual expenses, you can instead opt to deduct the £1,000 trading allowance. This will be advantageous if your actual expenses are less than £1,000. If your gross trading income (before deducting expenses) is £1,000 or less, you do not need to pay tax on it, or report it to HMRC.

Simplified expenses

To save work, instead of deducting actual expenses in relation to vehicles and expenses incurred if you run your business from home, you can use simplified expenses to work out the deduction. You can also use simplified expenses to work out the private use disallowance if you live in your business premises (as might be the case, for example, if you run a Bed and Breakfast).

Records

It is important to keep good business records so that you can identify your expenses and take them into account when working out your taxable profit. If you overlook deductible expenses, you will pay more tax than you need to.

Under Making Tax Digital for Income Tax Self Assessment (MTD for ITSA), sole traders and unincorporated landlords within its scope will be required to keep digital records of their trading and/or property income and provide quarterly updates to HMRC using MTD-compatible software. Its introduction is being phased in.

Phase 1 – April 2026 start date

From 6 April 2026, MTD for ITSA will apply to sole traders and unincorporated landlords whose combined taxable business and property income exceeds £50,000 a year. It is important to note that the trigger is the total from both sources. For example, a sole trader with business income of £40,000 who also has property income of £12,000 will need to comply with MTD for ITSA from 6 April 2026 regardless of the fact that separately neither business nor property income exceed £50,000.

Phase 2 – April 2027 start date

The MTD for ITSA mandation threshold is lowered to £30,000 from 6 April 2027. From that date, sole traders and unincorporated landlords with business and/or property income of more than £30,000 must comply with the requirements of MTD for ITSA.

Phase 3 – by the end of the current Parliament

At the time of the 2024 Autumn Budget, the Government announced that sole traders and unincorporated landlords with business and/or property income of more than £20,000 will be brought within the scope of MTD for ITSA by the end of the current Parliament. The precise date has yet to be announced – this will be done at a future fiscal event.

Plan ahead

It is important that sole traders and unincorporated landlords know their MTD start date and that they are ready to comply with the requirements of MTD for ITSA from that date. To do so, they will need to use MTD-compatible software. Details of software that ticks this box can be found on the Gov.uk website.

Business Asset Disposal Relief (BADR) is a valuable relief which reduces the rate of capital gains tax payable on gains made on the disposal of all or part of a business or the sale of shares in a personal trading company. The relief was previously known as Entrepreneurs’ Relief.

A sole trader selling all or part of their business must have owned the business for at least two years prior to the date of sale. The same test must be met where the business is being closed and the assets are being sold. Here the assets must be disposed of within three years after the date of cessation to qualify.

The relief is also available in respect of the disposal of shares or securities in a personal company that is either a trading company or the holding company of a trading group. A personal company is one in which the shareholder holds at least 5% of the ordinary share capital and that holding gives the shareholder at least 5% of the voting rights, and entitlement to at least 5% of the profits available for distribution and 5% of the distributable assets on a winding up, or 5% of the proceeds in the event that the company is sold.

Lifetime limit

The favourable capital gains tax rates only apply on gains up to the lifetime limit of £1 million. Spouses and civil partners have their own lifetime limit.

Rate

For 2024/25, gains eligible for BADR are taxed at 10%.

Prior to 30 October 2024, the BADR rate was the same as the capital gains tax rate for gains other than residential property gains and carried interest applying where  income and gains fall within the basic rate band. However, the latter was increased to 18% from that date (Budget Day), while the rate of capital gains tax once the basic rate band has been used up was increased from 20% to 24%. This increased the value of BADR – meaning for the remainder of the 2024/25 tax year it is worth 14% where gains would otherwise be taxable at the higher capital gains tax rate – a potential saving of up to £140,000.

However, this is a limited time offer and the disposal must take place before 6 April 2025 to access the 10% rate. From 6 April 2025, gains benefitting from BADR will be taxed at 14% – a saving of up to 10%. From 6 April 2026, the rate rises to 18%, bringing it back into line with the capital gains tax rate applying where income and gains fall within the basic rate band.

Timing

The date of disposal is key to accessing the best rates. Selling a business or shares in a personal trading company on or before 6 April 2025 will access the best rate of 10%. Where a disposal is on the cards, as long as the qualifying conditions have been met for the requisite two-year period, consideration could be given to bringing forward the disposal date to before 6 April 2025. If the business has already ceased, disposing of the business assets before 6 April 2025 will minimise the capital gains tax payable.

If a disposal before 6 April 2025 is not feasible, consider whether the business, business assets or shares can be disposed of before 6 April 2026 so that gains up to the available lifetime limit are taxed at 14% rather than at 18%. Unincorporated landlords thinking of exiting the furnished holiday lettings business when the favourable relief comes to an end may also wish to bring forward the cessation and the disposal of their properties to access the 10% rate.

Under payrolling, employers deal with taxable benefits provided to employees through the payroll, treating the taxable amount of the benefit like additional salary and deducting the associated tax from the employee’s cash pay. Where a benefit is payrolled, the employer does not need to report it to HMRC via the P11D process after the end of the year. However, the benefit must still be taken into account in calculating the employer’s Class 1A National Insurance liability on their P11D(b).

Currently, payrolling is voluntary and employers who wish to payroll must register to do so before the start of the tax year from which they wish to commence payrolling – it is not possible to join in-year. However, this is to change as from 6 April 2026 payrolling will become mandatory for all but a couple of taxable benefits. At the time of the Autumn 2024 Budget, the Government confirmed that mandatory payrolling will go ahead as planned, and provided more details as to what it will look like.

Excluded benefits

Mandatory payrolling will apply to all taxable benefits in kind with the exception of employment-related loans and employer-provided living accommodation. Currently, it is not possible to payroll these benefits, but voluntarily payrolling will be introduced for both of them from April 2026, meaning that employers providing these benefits can choose either to payroll them voluntarily or report them to HMRC after the end of the tax year via the P11D process. For 2026/27 and later tax years, it will no longer be possible to report other benefits on a P11D. Employment-related loans and living accommodation will be brought within mandatory payrolling from a later date.

Taxable amount

To find out the amount to include in the payroll in respect of the payrolled benefit, employers will need to calculate the cash equivalent of the benefit and divide it by the number of pay periods in the tax year. Where an employee is paid monthly, 1/12^th of the cash equivalent of the benefit will be taxed through the payroll each month.

If the cash equivalent value changes during the year, as would be the case, for example, if an employee changed their company car, the employer would need to recalculate the cash equivalent value and revise the payrolled amount accordingly for the remainder of the tax year.

End of year process

Employers will be expected to ensure that the amounts that are reported for taxable benefits in kind are as accurate as possible. Corrections should be made as soon as possible if the value changes in-year. However, an end of year process is to be introduced to provide for amendments to the taxable value of benefits that cannot be determined in-year. Details of this are not yet available and will be provided in due course.

Reporting requirements

Following the move to mandatory payrolling, employers will need to provide more information than they currently need to do so under the voluntary system. From April 2026, Class 1A National Insurance contributions on benefits in kind will also be collected through the payroll, rather than after the end of the year as now, and the reporting requirements will be increased to facilitate this and also to provide a more granular breakdown of payrolled benefits in kind.

Employers looking to spread some seasonal cheer can do so in a tax-efficient manner by taking advantage of the exemptions for annual parties and functions and trivial benefits.

Christmas parties

The tax exemption for annual parties and functions will only apply to a Christmas party if the following conditions are met.

1. The event is an annual event – one-off events do not qualify.
2. The event is open to all employees or to all those at a particular location.
3. The cost per head (inclusive of VAT) is not more than £150.

Some points are worthy of note.

While it is permissible to provide an event for employees at a particular location or working within a particular department, all employees at that location or within that department must be invited. Events for staff of a particular grade only, for example, managers, fall outside the terms of the exemption, and as such their provision constitutes a taxable benefit.

The cost per head is the total cost of providing the function, including extras such as transport and accommodation, divided by the number of attendees (employees and guests). The total cost includes VAT, even if this is later recovered.

If the cost per head is more than £150, the whole amount is taxable, not just the excess over £150. Where a tax charge arises and the employee brings a guest, the taxable amount is the cost per head for both the employee and their guest (so £350 for an event where the cost per head is £175).

Where more than one annual event is held in the tax year, all will be tax-free if the total cost per head does not exceed £150. Where the total cost per head is more than this, the exemption can be used to best effect.

Gifts

The trivial benefits exemption allows employers to provide employees with low-cost gifts without triggering a tax charge under the benefits in kind legislation. The exemption will only apply if the following conditions are met.

1. The gift is not cash or a cash voucher.
2. The gift does not cost more than £50.
3. The employee is not contractually entitled to the gift.
4. The gift is not provided under a salary sacrifice arrangement.
5. The gift is not provided in recognition for services performed or to be performed.

The cost of the gift is the cost to the employer of providing it. Where a gift is made available to a number of employees and it is not practicable to determine the cost of each individual’s gift, the average cost can be used instead. Directors and office holders of close companies and members of their family or household can only receive £300 of tax-free trivial benefits a year; for other employees there is no limit.

Care must be taken where the gift comprises a season ticket, voucher or a benefit accessed using an app. Here the cost is the annual cost, rather than the cost each time the season ticket, voucher or app is used. This may bring the gift outside the scope of the trivial benefits exemption, even if the cost of each individual item or use is less than £50.

Consider a PSA

If a taxable benefit does arise in respect of the Christmas party or a gift, consider meeting the liability on behalf of your employees by means of a PAYE Settlement Agreement (PSA). It is the season of goodwill after all.

One of the key announcements in the Autumn 2024 Budget was the rise in employer’s National Insurance contributions from 6 April 2025. From that date, the rate of secondary Class 1 National Insurance contributions is increased by 1.2 percentage points, from 13.8% to 15%. In a further blow, the secondary threshold – the point above which employer contributions become payable – will fall from £9,100 to £5,000.

On the plus side, the Employment Allowance is to rise from the same date, from its current level of £5,000 to £10,500. This will protect the smallest employers from the impact of the hike. From 6 April 2025, larger employers will once again be able to benefit from the Employment Allowance as the current restriction which limits availability of the allowance to employers whose secondary Class 1 National Insurance bill in the previous tax year was less than £100,000 is lifted. However, personal service companies where the sole employee is also a director remain unable to claim the allowance.

The upper secondary thresholds that apply where the employee is under the age of 21, an apprentice under the age of 25, an armed forces veteran in the first year of their first civilian job since leaving the armed forces or a new employee in the first three years of their employment at a special tax site are unchanged. However, the 15% rate will apply to any earnings in excess of the relevant upper secondary threshold.

The rate increase also extends to Class 1A National Insurance contributions (payable by employers on taxable benefits in kind, taxable termination payments and taxable sporting testimonials) and to Class 1B National Insurance contributions (payable by employers on items within a PAYE Settlement Agreement and on the tax due under the agreement), both of which rise to 15% from 6 April 2025.

Impact

The impact of the changes will depend on the number of employees that an employer has and the amount that they are paid. For example, for an employee on £20,000, before taking account of the Employment Allowance, employer’s National Insurance will increase from £1,504.20 for 2024/25 to £2,250 for 2025/26 – an increase of £745.80. However, for an employee on £100,000, the bill will rise from £12,544.20 for 2024/25 to £14,250 for 2025/26 – an increase of £1,705.80.

Very small employers with only a handful of employees who are not highly paid may find that their bills fall as the increase in the Employment Allowance outweighs the rise in secondary contributions. For example, an employer with three employees paid £30,000 will pay £3,652.60 for 2024/25 after deducting the Employment Allowance but will only pay £750 in 2025/26 after deducting the Employment Allowance. At the other end of the scale, as press reports attest, the additional cost can be significant. Employers with a workforce comprised predominantly of lower paid part-time workers, as is often the case in the hospitality industry, will be hard hit by the fall in the secondary threshold. Currently, no contributions are payable on earnings below £9,100; from April 2025, employer contributions are due on earnings over £5,000.

Mitigation

Eligible employers should ensure that they claim the Employment Allowance as this is not given automatically. Consideration can also be given to the make-up of their workforce. For example, savings can be made by employing workers under the age of 21 or armed forces veterans looking for their first civilian job, as contributions are only payable where earnings exceed £50,270 rather than £5,000 – potential savings of up to £6,790.50 per employee. Taking on two part-time workers rather than one full-time worker will also cut the bill by accessing a further £5,000 NIC-free band (saving £750).

Employers should also review the taxable benefits that they provide, and consider instead a switch to exempt benefits to save the associated Class 1A National Insurance. Employers should also review existing PAYE Settlement Agreements to check whether they remain affordable.

When starting a business, there are a number of ways in which this can be done. Options include operating as a sole trader, forming a partnership or setting up a limited company. Of these, operating as a sole trader is the simplest.

Taxes you must pay

If you run an unincorporated business as a sole trader, you are self-employed for tax purposes. If you make a profit, you will need to pay income tax on that profit if your total taxable income for the year is more than your tax-free allowances. Unlike a company, the tax bill for your business is not worked out separately; rather, it is taken into account in working out your overall personal tax liability for the tax year. Depending on your profit level, you may also need to pay Class 4 National Insurance.

Registering as a sole trader

You only need to tell HMRC about income from self-employment if you earn more than £1,000 in the tax year before deducting expenses. The £1,000 limit applies across all your self-employments, rather than per business. This £1,000 limit is known as the trading allowance.

Where your income exceeds the trading allowance, you will need to register for Self Assessment if you are not already registered. You can do this online (see www.gov.uk/register-for-self-assessment). This must be done by 5 October following the end of the tax year in which a liability first arose.

National Insurance

If your profits from self-employment are more than £12,570 for 2024/25, you will need to pay Class 4 National Insurance. For 2024/25, this is at the rate of 6% on profits between £12,570 and £50,270 and at the rate of 2% on profits in excess of £50,270. The payment of Class 4 National Insurance will earn you a qualifying year for state pension purposes.

If your profits are between £6,725 and £12,570, you will not have to pay any Class 4 National Insurance, but you will be awarded a National Insurance credit which will give you a qualifying year for state pension purposes for free. If your profits are less than £6,725 for the tax year, you will not receive the National Insurance credit. However, you can pay Class 2 contributions voluntarily at the rate of £3.45 per week to help build up your state pension entitlement.

Keeping records

You will need to keep records of your income and business expenses so that you can work out your profit. The default basis of accounts preparation is now the cash basis, under which you only take account of cash in and cash out. When working out your profit, you can deduct the £1,000 trading allowance rather than actual expenses if this is more beneficial (which will be the case if your actual expenses are less than £1,000).

Paying tax and National Insurance

Under Self Assessment, your tax and Class 4 National Insurance bill must be paid by 31 January after the end of the tax year to which it relates (so by 31 January 2026 for your 2024/25 profit).

If your tax and Class 4 National Insurance bill for the previous tax year is £1,000 or more, you will need to make payments on account. This means that you will have to pay 50% of the previous year’s liability on 31 January in the tax year and 31 July after the end of the tax year. Any balance due must be paid by 31 January after the end of the tax year.

It is prudent to put away money each month so that you have it available to pay your tax bill. Alternatively, you can set up a budget plan with HMRC.

In personal and family companies, the lines between the company’s finances and the director’s finances may become blurred. A director may withdraw money from the company for personal use or may lend money to the company. The company may pay some of the director’s personal bills, and the director may personally meet some company expenses. The director’s loan account is simply an account for recording the transactions between the director and the company in much the same way as a bank account.

At the company’s year end, the director’s loan account may show a zero balance. Alternatively, the account may be in credit. This may be the case if the director has provided a loan to the company or personally met company expenses. The third scenario is that the director’s loan account is overdrawn. Where this is the case, the director owes money to the company.

Implications of an overdrawn director’s loan account

An overdrawn director’s loan account may have tax implications for both the director and the company. This will depend on the loan account balance and whether it is cleared by the corporation tax due date.

As far as the company is concerned, if the director’s loan account balance remains outstanding on the date on which corporation tax for the period is due (which is nine months and one day after the company’s year end), the company will need to pay tax on the balance at that date. The tax is paid at the same time as the corporation tax for the period, but crucially is not corporation tax. The charge is imposed by section 455 of the Corporation Tax Act 2010 and is generally referred to as ‘section 455 tax’.

The rate of section 455 tax is aligned with the dividend upper rate, currently 33.75%. Unlike most taxes, it is refundable once the loan has been cleared, with the tax becoming repayable nine months and one day from the end of the accounting period in which the loan is cleared (i.e. the corporation tax due date for that period).

The tax is to a certain extent voluntary as there will be no section 455 tax to pay if the director clears the overdrawn balance ahead of the corporation tax due date. There are various ways in which this can be done. For example, the director could introduce personal funds to the company, the company could declare a dividend to clear the loan balance or pay a bonus. However, there may be a tax cost of clearing the loan and, where this is higher than the section 455 tax, it may be preferable to pay the section 455 tax instead, reclaiming it when the loan balance can be cleared in a more tax-efficient manner.

If the outstanding loan balance tops £10,000 at any point in the tax year, the director will be liable to a benefit in kind charge on interest on the loan balance at the official rate (assuming the director pays no interest on the loan). The company will also pay Class 1A National Insurance at 13.8% on the taxable amount. However, there is no tax or Class 1A National Insurance to pay if the balance remains below £10,000, enabling a director to borrow up to £10,000 for up to 21 months (if the loan is taken out at the start of the accounting period) tax and interest-free. This can be worthwhile.

If you pay tax through PAYE, as will be the case if you are an employee or a pensioner, you may need to complete a Self Assessment tax return if you have other sources of income, such as income from property or investments or from self-employment. If at least 80% of the tax that you owe is collected through PAYE, you will not have to make payments on account, even if the tax that you owe under Self Assessment is more than £1,000.

The normal deadline for paying tax under Self Assessment is 31 January after the end of the tax year, so by 31 January 2025 for 2023/24 tax. However, if you file your return earlier, you may be able to pay the tax that you owe through PAYE via an adjustment to your tax code.

30 December deadline

To take advantage of the opportunity to pay the tax that you owe for 2023/24 through PAYE, you must file your tax return by 30 December 2024 if you file online. If you have already submitted a paper return by the 31 October paper filing deadline, you may also qualify.

You will not be able to pay your tax through your tax code if:

• you do not have sufficient PAYE income for HMRC to collect the tax that is due;
• paying tax in this way will mean that more than 50% of your PAYE income is deducted in tax; or
• you will pay more than twice as much tax as you do normally.

Further, you can only pay the tax that you owe under Self Assessment in this way if the amount that you owe is £3,000 or less. It is important to note that this limit applies to the total amount of tax that you owe under Self Assessment – if you owe more than £3,000, you cannot make a part-payment to reduce the bill to £3,000 and then pay this through your tax code.

Where the return is filed on time, the amount that you owe is £3,000 or less, you already pay tax under PAYE and you are not otherwise excluded from paying your tax through PAYE, HMRC will automatically adjust your tax code to collect the tax that you owe, unless you specify on your tax return that you do not want the tax collected in this way.

If you are not eligible to pay through PAYE despite your bill being £3,000 or less, you will need to pay what you owe by 31 January 2025, or set up a Time to Pay arrangement with HMRC.

Collection mechanism

To collect tax through PAYE, your tax code will be adjusted so that your tax-free allowances are reduced. The amount of the reduction will reflect both the tax that you owe and your marginal rate of tax. For example, if you are employed and owe tax under Self Assessment of £2,000 in respect of rental income and you are a higher rate taxpayer paying tax at 40%, your tax code will be adjusted by 500 (as 40% of £5,000 is £2,000). This will mean if you receive the basic personal allowance of £12,570, your tax-free allowance will be reduced by £5,000 and your tax code will be reduced to 757L.

To collect tax for 2023/24, the adjustment is made to the 2025/26 tax code, so that the tax is collected in 12 equal instalments throughout the 2025/26 tax year.

Advantages

Opting to pay tax through PAYE removes the need to pay the tax in a single payment by 31 January 2025. It also provides the option to pay in instalments without the need to set up a Time to Pay arrangement, with the added advantage that the instalments are interest-free. By contrast, interest is charged where tax is paid in instalments under a Time to Pay arrangement The first payment is not made until April 2025, providing a further cash flow benefit.

On the downside, your take home pay will be reduced as a result.