Self-employed Brits have been warned that they could face a 150% tax bill this month under self-assessment rules. Millions of people who work for themselves are required to make advance payments towards next year’s tax liability as well as paying money owed for the last 12 months under the payments on account system. It means newly self-employed people have to pay 150% of their tax bill in January, alongside a further 50% in July as part of HMRC‘s structure designed to spread costs across the year.
Sam Dewes, of accountancy firm HW Fisher, told The Telegraph: “In effect, self-employed workers pay 150% of the tax due for the previous year in one go. Thereafter, the payments smooth out. But this does mean the first year’s tax liability can be very scary.”
The measures were put in place to ensure self-employed workers keep an eye on their tax liabilities and bring them in line with other employees who contribute monthly through the Pay As You Earn (PAYE) system.
Claire Thackaberry, of the Low Income Tax Reform group, warned that newly self-employed workers could be caught out, however, especially if their earnings are inconsistent.
“Usually it is taxpayers encountering payments on account for the first time who will feel the pinch,” she said. “They may find that they effectively need to pay 150% of their tax bill in one go – the whole of last year’s tax bill and an additional 50% towards the current years estimated tax bill.”
“For many, this is surprising and confusing,” she added. “If taxpayers cannot afford to pay everything at once, they may be able to arrange a payment plan with HMRC, known as a ‘time to pay arrangement’.
“This is a good way of avoiding late payment penalties and debt collection action from HMRC, but interest charges will continue to apply.”
Ms Thackaberry warned that workers can also apply to reduce their payments on account if they anticipate earning less in the coming tax year but should be careful not to reduce it by too much in case their circumstances change.
“HMRC charges interest and, in some cases, penalties, if the reduction has been too much and without good reason,” she said.
Alongside self-employed workers, people who make over the £1,000 annual trading allowance through side hustles may also have to declare their income their self-assessment.
A spokesperson for HMRC said: “Payments on account are not due before the income is earned and have helped customers spread the cost of their tax and avoid arreas for decades. They can be easily amended if income levels change.”