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Freelancers and contractors could be hit with tax bills higher than income 

Self-employed could face tax bills higher than their income because of the pandemic

Many freelancers and contractors will be hit with multiple tax bills next year that fail to take into account the loss of earnings as a result of the Coronavirus crisis, according to an analysis carried out by insurer Royal London.

Normally, independent workers who file an annual self-assessment tax return are also required to make two ‘payments on account’ – one in January, the second in July.

This is essentially tax paid in advance and is based on the previous year’s income. It can therefore be difficult to forecast and sometimes larger than expected, which is often an unwelcome surprise for those who have lost work during the year. 

Under the Coronavirus emergency measures, the government has allowed the self-employed – whether sole traders or freelancers and contractors working via their own limited company – to defer the payment on account due in July 2020 to January 2021. 

Payments on accounts ‘bear no relation’ to reduced earnings

However, this may result in freelancers and contractors losing out overall, Royal London says.

More recently, the Chancellor announced a payment scheme, whereby these bills can be spread over 12 monthly instalments. From 1st February 2021, those who opt for the monthly instalments will also have to pay an interest of 2.6 per cent on all outstanding tax.

This means next year, many self-employed people will have to make additional payments on top of their regular tax bills. And the bills they do settle, for many they will “bear no relation to 2020’s reduced earnings”, Royal London claims.

The self-employed sector has been one of the hardest hit by the pandemic. More than 2.7 million people have made claims through the Self-Employed Income Support Scheme (SEISS), while Government support has largely overlooked around 2m limited company directors, who experts have said fall between the cracks. 

According to IPSE, on average, freelancers’ income dropped by more than 30 per cent in the first half of 2020 – with the biggest fall in Q2 of 25 per cent when measured against Q1. Many others have earned nothing at all, reporting a complete wipeout of income because of the Coronavirus pandemic. 

Royal London estimated that if a self-employed person who previously earned £50,000, saw their income drop to £15,000, their total tax bill next year would be £16,682. This would include 2019/20 and 2020/21 payments on account, despite their annual earning dropping to below this amount.

Government measures do not go far enough

The insurer is urging freelancers and contractors to contact HMRC and make sure they are not overpaying tax. They are also reminding people that they can also ask to reduce their payments on account.

Mona Patel, consumer spokesperson for Royal London, 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.”

By Contractor Weekly


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8 thoughts on “Freelancers and contractors could be hit with tax bills higher than income ”

  1. Graham

    Why does the article not appear to mention that you can get your accountant (or yourself if you want) to request an adjustment to the instalments, or if you have overpaid, get the overpayment back within a few days?
    Some of these articles don’t do contractors any favours at all.

    • Rob Reynolds

      Absolute ditto with the adjustments, I do that every year as no two years are the same for me.
      The article makes contracts look more like employees not conversant with managing their commercial affairs.

  2. Geoff

    A non story if every there was one. As stated by Graham, the tax can be adjusted. Also, most contractors will be working through limited company’s and different rules apply.

  3. M

    As stated above, during the SA process itself you can opt to reduce your PoA and that includes making it zero.

    Its not even so much a request or application either – just fill out the boxes and its applied.

    Personally, I dont know why any PSC contractor would pay in advance ?

    Just as an aside, if you submit the SA online before the 31st of Jan, they want the balance straight away and its automated emails galore until you pay it.

    Personally, I usually do it two working days before the 31st of Jan, just in case of issues.

  4. XY

    Adding to the above, you don’t even have to ask for it to be adjusted. If you don’t pay it and it turns out not to be due then you will face a demand for the tax plus interest at their stupidly punitive rates.

    If it’s not due, nothing happens – obviously.

    So you can simply pay an amount equal to what you think will be due, if anything, and you’ll be fine.

    • XY

      Sorry, the above has an extra “not” in the second sentence. Where it says this:

      ” If you don’t pay it and it turns out *not* to be due then you will face a demand for the tax plus interest at their stupidly punitive rates.”

      It should of course read:

      “If you don’t pay it and it turns out to be due then you will face a demand for the tax plus interest at their stupidly punitive rates.”

      The *not* highlighted in the first version shouldn’t be there. Basically, they’ll only come after you for the tax if it turns out that it was actually due. That’s from my accountant.

  5. Andrew Emanuel

    Go to your Tax Returns (SA110 2020 Page TC 1) – Payments on Account Box 10 put an X in and in Box 11 the amount you honestly think you should pay, then in Box 17 give an explanation why. Remember you can always challenge HMRC’s decisions in writing.

  6. Roister Doister

    Thanks so much to the commenters for mentioning the option to reduce your payments on account. In particular to Andrew, who spelled it out nicely.

    I was thinking I would need a loan to make the payment, and then hopefully get a refund next year, to repay the loan. The Peter & Paul approach to money management 🙂

    If that does work correctly, it will save me a lot of effort, interest payments & headaches!

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