Millions of freelancers who received support grants during the pandemic face paying thousands of pounds more in income tax this year because HM Revenue & Customs’ automatic bills calculator does not take fluctuating incomes into account.
It threatens to damage self-employed workers’ cash flows just as businesses are dealing with the spread of the omicron variant, accountants have warned.
It is due to the tax office’s “payment on account” system, which calculates advanced tax payments based on bills from the previous year. The next of these half-yearly payments is due on January 31.
There is always a risk of overpaying because of how the system works, but this year there is an even greater chance of self-employed people paying over the odds, as state support payments received during the pandemic, which are taxable, have skewed earnings.
Michelle Denny-West, of tax firm Moore Kingston Smith, said the issue was “more problematic this year,” because tax on the self-employed income support scheme grants was now included in calculations along with normal trading profits.
“HMRC automatically calculates payments on account for 2021-22 based on the 2020-21 tax bill, which will include the first three rounds of the grant income.
“If people who claimed via the first three grants have seen their business income decline in the current tax year or did not claim the fourth and fifth grants, which are due to be paid this tax year (2021-22) their taxable earnings will be less, but their bills will still be based on last year’s higher income, meaning many will overpay,” she said.