How to avoid being one of the million freelancers that will overpay tax in 2021

Almost a million struggling freelancers face overpaying tax this year because of HM Revenue & Customs’ automatic system which does not take earnings lost during the pandemic into account.

One in five of Britain’s four and a half million freelancers who saw their incomes drop last year will overpay if they fail to ask the tax authority for a reprieve, research has suggested. 

This is because HMRC’s “payment on account” system calculates advanced tax payments based on tax bills from the previous years – and dips in income incurred throughout the year are not factored in.

The first of these advanced payments is due on January 31. The tax authority will allow self-assessment taxpayers to reduce their payment on account bills if their earnings have dropped but more than a third of freelancers are unaware this facility exists, according to accountants TaxScouts.

HMRC will eventually refund any taxpayers who pay over the odds and anyone underpaying will be hit with interest charges. 

However, self-employed people unsure of their earnings this year risk running out of cash if they pay too much. Experts said it would pile yet further pressure on the self-employed, a group particularly hard hit in 2020.

Andrew Chamberlain of the freelancer trade body IPSE said hundreds of thousands of freelancers could be “unfairly” caught.

“Right now, because of the pandemic and the gaps in support, the freelance sector is under more financial strain than at any time in recent history. The last thing it needs is mistaken tax bills adding to that,” he said. 

Freelancers’ incomes dropped 30pc to their lowest levels on record after the pandemic and have remained depressed. More than quarter of a million freelancers gave up on the self-employed dream to return to employed work, causing freelance numbers to drop and reversing a decade-long upward trend (as the below chart shows).

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