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.