Self-employed at risk of overpaying tax

Self-employed at risk of overpaying tax
 Credit: Chris Ratcliffe/Bloomberg

Warning bells have been sounded that thousands of self-employed workers are at risk of automatically overpaying tax this year through the taxman’s preprogrammed payment system.

Figures from TaxScouts show one in five freelancers have been automatically moved onto HM Revenue and Customs’s Payment on Account system, which allows tax payments to be taken in advance based on the previous year’s tax return and estimated future earnings.

Due to the automatic nature of the system, it will not account for lost income during the pandemic.

Although self-employed workers are able to reduce their Payment on Account bill if they so choose, of the 1,100 polled late last year some 40 per cent of freelancers were unaware of this feature.

The Association of Independent Professionals and the Self-Employed has called on HMRC to take action to avoid hundreds of thousands of freelancers overpaying tax in 2021. 

It urged HMRC to raise awareness about the option to reduce Payment on Account tax bills and also make the second advance payment – due in July 2021 – optional. 

Andy Chamberlain, director of policy at IPSE, said: “HMRC is trying to do the right thing here, but the message clearly isn’t getting through. And, with so many freelancers already struggling from the financial impact of the pandemic, they must not face further strain because of a failure of communication. 

“We urge HMRC to do more to raise awareness about this issue and ensure hundreds of thousands of freelancers do not unfairly take another financial hit.”

Mr Chamberlain said the government should “step up its communications” about both Payment on Account and Time to Pay, which helps freelancers spread their tax payments throughout the year.

He added: “Right now, because of the pandemic and the gaps in support, the freelance sector is under more financial strain than any time in recent history. 

“The last thing it needs is mistaken tax bills adding to the pressure: the government must address this and do all it can to support the UK’s vital freelance workforce.”

The research showed 7 out of 10 freelancers believed self-employed taxes should be simplified.

Mart Abramov, chief executive of Tax Scouts, said the complexity of the tax system left a “considerable number” of the self-employed confused and stressed when it came to handling their taxes.

He added: “We’d like to see HMRC better communicate the actions people should be considering now to manage cash flow next year.”

HMRC reiterated that it stood ready to support any taxpayer in financial distress as a result of Covid-19 and urged those struggling to contact the government as soon as possible.

The spokesperson added: “Our guidance is clear that customers can ask to reduce their payments on account online or by post if they know their tax bill is going to be lower than last year.”

The government has come under constant scrutiny throughout the coronavirus crisis to expand support for self-employed workers, some of whom fall outside the government’s current schemes.