The second instalment of 2011/12 tax is due to be paid on 31 July 2012. In normal circumstances, these payments are calculated as 50% of a partner’s 2010/11 tax liability. However, if a partner’s 2011/12 tax liability is anticipated to be lower than for 2010/11, then interim instalments based on the 2010/11 liability will be too high.
The tax system allows a partner facing such a situation to make a 'payment reduction claim' to reduce the 2011/12 interim instalments to 50% of the estimated 2011/12 liability.
In these times of constrained finances and cashflow, firms should check whether any of their partners might be able to make such a payment reduction claim.
There are three general circumstances which would lead to a claim being appropriate: the most obvious is that the firm’s tax-assessable profits have fallen from the previous year.
The second circumstance the firm could also probably spot is where an individual partner’s profit share has fallen – even if the firm’s profits overall have increased.
The third circumstance may only be known to the partner concerned. This is where he/she has significant personal deductions for tax in 2011/12, usually through tax-efficient investment planning, for example, in making pension contributions.
It is worth remembering that the rules for tax relief on pension contributions were significantly relaxed in 2011/12, particularly for those partners earning above £150,000. Some partners may therefore have considerably increased their tax-deductible pension contributions and, given the scare that the rules might have been tightened again in the March 2012 budget, many of these increased contributions may only have been made in February and March 2012 – such that they would not have been taken into account in any review of the first instalments of 2011/12 tax paid on 31 January 2012.
Louis Baker is head of the professional practices group at Crowe Clark Whitehill
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