How do I allocate my tax payment?

This is a summary of a question written in Taxation Magazine, which we responded to.

The question of payment allocation needs to be considered carefully where there are a number of outstanding tax liabilities over a number of years. HMRC’s default position is that the payments are allocated against the earliest liability. Normally this is beneficial to the taxpayer as it reduces the interest accruing on the earliest liabilities.

However, this is not always the best course of action, particularly if (for example) one payment is already so late no further penalties will accrue but another more recent liability should be paid to prevent further penalties accruing. In this case, what is the mechanism for the taxpayer to allocate the payment?

Previously, where payments were made by cheque, it was straightforward to write a letter accompanying the cheque and the payment would be allocated as requested. Now, as payments are made electronically, there is no way to send in a payment allocation request at the same time as making payment.

Taxpayers (or advisers) therefore need to write to the Self-assessment or debt management team as appropriate stating the preference for the allocation and either enclose a cheque or make the payment once the letter has been received. Ensure you keep a copy of the letter and send it to HMRC tracked so you know when it has been received. Note that with Royal Mail Signed For, in our experience the letter has not always been signed for so it is best to send the letter tracked.

Unfortunately, simply writing allocation instructions to HMRC doesn’t always work and you will probably need to keep an eye on the allocation and then chase this with the self-assessment team if (when) the allocation happens automatically instead of per the request. In our experience, the payment allocation has been overridden manually but this required several calls to HMRC.

This guidance from HMRC may be of assistance: https://www.gov.uk/hmrc-internal-manuals/debt-management-and-banking/dmbm210105

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