One Million Freelancers Risk Paying Too Much Income Tax

Disclaimer: We may earn a small commission if you click on links on this page. This helps us keep producing free content.
HMRC expects freelancers who are not trading to pay taxes on profits they have not made.

When around one million struggling self-employed people are billed in a week’s time, they face paying too much income tax, because HM Revenue & Customs’ calculations have not taken into account coronavirus losses.

HMRC is billing freelancers and SMEs on the basis of how much they earned before the pandemic, even if they were forced to close last year and their earnings slumped. According to online tax service, TaxScouts, one in four of the UK’s 4.3 million freelancers now faces paying too much tax on bills due at the end of the month. Accountancy firm RSM UK said one in three could be caught out.

Experts have warned that sole traders and shopkeepers could face ruinous cash flow problems as a result, before the tax authority corrects matters and issues refunds at the end of the year.

Yet there are ways to avoid overpaying and some may even be eligible for a refund.

Freelancers able to ‘self-assess’ tax bill

Most self-employed people pay their taxes ‘on account’ in advance in two instalments, one half in January and the other at the end of July. The tax demands are based on the previous year’s bill, so this year freelancers will be taxed for 2020-21 on the basis of how much they earned before the pandemic in 2019-20.

Tram Abramov, CEO and co-founder of TaxScouts, said after 16 months of financial uncertainty, the self-employed are expected to come up with the money to pay tax that they probably do not have.

Sarah Coles, of the investment firm Hargreaves Lansdown, said there will be a ‘balancing payment’ due next January, when individuals will be entitled to a refund for the amount they have overpaid, but there could be all sorts of cash-flow problems in the meantime.

But freelancers are not obliged to accept the advance payments HMRC demands and are entitled to ‘self-assess’ their own tax bill to a lower amount if they have genuine reasons for doing so, such as disruption following coronavirus. For instance, if profits halved last year, a taxpayer may have no tax due in July after their January payment. They could even be entitled to a refund.

Self-employed can use ‘time to pay’ facility

According to new research from Ipse, the self-employment trade body, three out of five freelancers lost money during the pandemic. Almost half lost more than 40p of their normal income, while one in nine reported a drop in earnings of more than 90pc.

A request to pay less can be made with a simple phone call, but research suggests that more than one third of freelancers are unaware of the facility.

Chris Etherington, of RSM UK, said he has already reduced payments for several clients. His experience indicates that at least 20pc of self-employed taxpayers could benefit from reviewing their payments on account and possibly reduce their bill this year. But there is a drawback, he said. If you underestimate what you owe, you will be charged interest on the outstanding balance.

Another option is to file a tax return for 2020-21, which will update your account and mean you only pay the tax you owe. However, as tax returns are typically not filed until the new year, not everyone will be able to do this, as many will not have a complete picture of their income and all the paperwork required, So far this year, only 2.1 million people out of around 12 million, fewer than one fifth, have filed their return, HMRC said. The deadline is 31 Jan 2022.

Taxpayers can also ask HMRC to pay their bill in monthly instalments, known as ‘time to pay’, if they are struggling. More than 860,000 people have asked for help in this way.

HMRC said taxpayers should get in touch if they think they are at risk of overpaying.

Photo of author
The Business4Beginners news team consists of several writers who each have their own unique experience in businesses. By keeping their fingers on the pulse, they bring you the latest in news and trends impacting small UK businesses.
Share on:
Main Newsletter - Special Report

Why businesses fail eBook


Why 1 In 5 Businesses Fail In Their First Year

Download your FREE copy when you subscribe to our email newsletter with regular updates and business-boosting tips.

You can unsubscribe at any time.
See our Privacy Policy.