HMRC follows a systematic approach to allocate payments. Generally, they prioritize the oldest outstanding debt first.
This means that if you have multiple tax liabilities, the earliest one will be settled first.
However, there are some rules and exceptions to this general principle, which we will explore in more detail.
How to Allocate Your Payment Yourself
While HMRC has its default allocation process, you have the right to specify how you want your payment to be applied.
This can be particularly beneficial if you have multiple debts and want to prioritize a specific one.
To allocate your payment, you typically need to include a covering letter with your payment, clearly stating which tax year or liability you want the payment to be applied to.
Can I Change the Allocation After Payment?
Yes, you can usually change the allocation of your payment after it has been made, but there are limitations.
You generally have the right to request a reallocation up until the point when HMRC communicates the allocation to you.
After this point, or if you initially specified the allocation, you are bound by that decision.
What Happens if I Overpay My Tax?
If you overpay your tax, HMRC will typically allocate the excess payment to the next tax year or against other outstanding tax liabilities.
However, you can request a refund of the overpayment. Be aware that there might be delays in processing refund requests.
How Are Payments Allocated for Self-Assessment?
For Self-Assessment tax, HMRC prioritizes the oldest outstanding tax year.
If you have multiple tax years with outstanding balances, the earliest year will be settled first.
However, if you make a payment on account, it will typically be allocated to the current tax year.
What About Payments on Account?
Payments on account are essentially advance payments towards your Self-Assessment tax liability for the upcoming year.
HMRC automatically allocates these payments to the relevant tax year.
If you overpay on account, the excess will usually be carried forward to the following year.
How Do I Allocate a Payment to a Tax Year?
To allocate a payment to a specific tax year, you should include a covering letter with your payment clearly stating the tax year you want the payment to be applied to.
Ensure you provide your Unique Taxpayer Reference (UTR) and the tax year in question for accurate allocation.
What if I Don’t Allocate My Payment?
If you don’t specify how you want your payment allocated, HMRC will apply it according to their default rules.
This might not be in your best interest if you have multiple tax liabilities or want to prioritise a particular debt.
Therefore, it’s important that you take control of the allocation process.
Can I Appeal an Incorrect Payment Allocation?
Sadly, there is generally no right to appeal a payment allocation decision.
But you can contact HMRC to discuss the issue and request a review of the allocation.
When doing so, providing clear evidence and explanations can increase your chances of a successful outcome.