As reports suggest that the Treasury is considering a number of dramatic tax increases on the self-employed, including a rise in National Insurance Contributions, Royal London is urging the Government to make the requirement to pay tax in advance easier and simpler and to allow for the impact that a drop in income has on tax planning.
Usually, self-employed workers who file annual Self-Assessment forms must also make two ‘payments on account’, one in January and one in July. Unlike PAYE employees, the self-employed are expected to pay tax in advance. It can result in large bills and often comes as a nasty surprise for the newly self-employed.
While it is possible to ask HMRC to reduce payments on account and, thanks to the Chancellor’s recent announcement, also possible to set up a series of monthly tax bill instalments instead of paying a large lump sum, the onus is on the self-employed to sort this out themselves. The system is incredibly complicated and the self-employed may need extra help to understand their options.
The situation is exacerbated due to the way that tax is calculated for the self-employed, as the table below explains. Not only are self-employed people expected to pay some of their tax bill in advance, next year they must make an extra payment on account after the Chancellor deferred one of 2020’s bills. Put simply, many self-employed people will have to settle tax bills which bear no relation to 2020’s reduced earnings.
|Payment on account due by July 31 2020 – calculation based on income earned in the 2018/19 tax year
||Payment on account due by July 31 2020 deferred – final payment must be made by January 31 2022
|Payment on account due by January 31 2021 – calculation based on income earned in the 2019/20 tax year
||Payment on account due by January 31 2021 deferred - final payment must be made by January 31 2022
|Self-assessment tax bill (also known as the balancing payment) due by January 31 2021 - calculation based on income earned in the 2019/20 tax year **
Self-assessment tax bill (also known as the balancing payment) deferred - final payment must be made by January 31 2022
Millions of self-employed people suffered a loss of income during the pandemic. More than 2.7 million people have so far claimed support from the Self-Employment Support Scheme (SEISS). Although the average drop in freelancer income was more than 30% in first half of 2020, according to IPSE, some self-employed people have reported that their regular income has been completely wiped out by the pandemic. According to the Office for National Statistics, nearly one in seven workers in the UK are self-employed, a total of 4.76 million.
If a self-employed person who previously earned £50,000 saw a drop in income to £15,000, their total tax bill next year would be £16,682 * to cover 2019/20 as well as 2020/21 payments on account, despite their annual earnings having dropped to less than this amount.
Royal London is urging self-employed people who may not know that they can ask for their payments on account to be reduced, or that they can spread out their payments, to contact HMRC and make sure they are not over-paying tax. Most of this is done online and falls under ‘Time to Pay’ arrangements. Those who think they have overpaid can claim a refund but this can take weeks to process.
Anyone who misses the 31 January self-assessment deadline also faces late payment penalties and interest charges. In addition, those self-employed who choose to spread out their tax payments in 2021 will be charged interest by the Revenue.
Mona Patel, consumer spokesperson, said:
“Many self-employed people may be expected to pay more in tax than they have actually earned in the past year because of the payment on account system. This lack of ‘real world’ tax bills means it’s perfectly feasible that those who have suffered the steepest drops in income could find themselves in this situation. While the Revenue has announced a system that enables people to pay in more manageable instalments, this still doesn’t go far enough for those who could end up overpaying tax unnecessarily because their bill is based on last year’s earnings. We urge HMRC to do the right thing and help the self-employed understand their options.”
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