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.
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.
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.”