Freelancers who claimed Covid-support grants have been dragged into paying 40pc higher-rate tax because of a quirk in how they file accounts.
Self-employed workers face paying double the amount of tax than others making exactly the same amount of money, due to settling their “end of year accounts” just 30 days apart.
This is because freelancers must choose when their financial year ends. This determines in which year the tax needs to be paid. For example, a set of accounts ending on March 31 2020 will be taxable in the 2020-21 tax year. However, accounts ending just a month later on April 30 will be taxable in the 2021-22 year.
However, self-employed-income support scheme grants are taxable in the year they were paid out. Taxes due on the first batches handed out in 2020 are now due, with the Jan 31 deadline for 2020-21 less than a week away.
It has meant freelancers end their financial year early on in the tax year, at the end of April for example, face paying higher rates, as they are being charged on earnings that arose prior to the pandemic, on top of the grants.
Someone who filed just a month later would be assessed in the following tax year, meaning their coronavirus losses would be taken into account – and the tax bill would not be due until January 2023. (see example below)