Freelancers risk overpaying £4,000 in tax

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 selfemployed 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 Jan 31. There is always a risk of overpaying because of how the system works, but this year there is an even greater chance of paying over the odds as support payments, 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 grants.

“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, 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.

A higher-rate payer would pay more than £4,300 over the odds if they claimed the first three grants of up to £21,570 in 2020- 21, but then stopped claiming help, assuming their trading profits were the same in both years.

Close to three million freelancers claimed help during the pandemic, with almost £30bn paid out in five grants over the course of the crisis.

Most people put in a claim at the height of the crisis, with 77pc of those eligible taking money in the first round of payments, claiming close to £3,000 on average, according to official figures.

HMRC will eventually refund any taxpayers who pay over the odds. It said struggling taxpayers should get in touch for help, saying it wanted “to make sure companies are getting their tax returns right, first time, including any Covid-19 support payment declarations”.