Tax return: The self-employed are unfairly affected by HMRC's upcoming payments on account deadline

“Is the charge fair?” Kaylie Pferten explains why self-assessment taxpayers are suffering because they have until the end of July to pay the most recent installment of their tax return

As payments on account are due to HMRC in the upcoming weeks, millions of self-employed individuals will receive an additional tax return bill.

Around 12 million people are typically expected to file a tax return for untaxed earnings from the previous fiscal year, which is when self-assessments receive the majority of attention.

However, HMRC has a method to make sure independent contractors like me are paying their taxes on time by making account payments. It is not just interested in collecting money that was owed from the previous tax year.

This comes as data reveals that since 2020, HMRC has assessed 513 million in interest on income tax late payments.

Although everyone wants to pay their fair share of taxes, the account-based payment system is unjust to independent contractors for a number of reasons.

Payments on account: What are they?

HMRC adds payments on account to your bill if you haven't paid more than 80% of your tax code or if your self-assessment shows that you owe more than £1,000 in taxes.

The remaining amount is due by July 31st, and one portion is added to your bill on January 31st.

Many tax professionals, accountants, and HMRC contend that this benefits independent contractors because it allows them to budget for these payments if they complete their self-assessment before the April tax year ends.

In theory, you have six months until the end of July to pay the remaining balance on your current tax year's bill, with the first installments due on account. If you are well-organized, you will have from April to January to pay half of your bill.

If you believe your earnings will decline, you can ask HMRC to reduce your account payments; if you pay too much, you can receive a refund. However, if you underpay, interest might be applied.

It is crucial to make the payment because HMRC can impose late payment penalties of up to 5 percent if a tax payment is 30 days past due, in addition to 7 point 75 percent interest from the day after the payment is due.

As stated by Stevie Heafford, tax partner at the accounting firm HW Fisher, "the payments on account scheme is designed to help people better manage the cost of their tax bill by splitting the amount into two payments and spreading the payments across the year."

Missing the deadline, however, can be an expensive error.

Although paying taxes is crucial, the system that tracks account payments does not account for the realities of working for yourself.

What happens if your income fluctuates?

Although working for myself gives me a lot of flexibility, it also means that my income is subject to change.

The amount of commissions I receive each month as a freelance journalist and the generosity of editors with regard to rates and shifts determine how much money I make.

Therefore, even though my most recent tax return indicates that I had a successful year financially, if commissions stop coming in, that could all change in the coming six months.

The experience is similar to choosing to eat a costly meal at a restaurant once and then being served and charged the same amount the next time.

Problems with self-employed workers' invoices.

Getting paid is a problem even though I am aware of my expected income.

Many publications pay on time, but in other situations, I might have to wait weeks or months for an invoice to be paid, or I might never be paid at all.

Many occupations have erratic incomes, and this is particularly true if your earnings have increased significantly in a single year.

The principal adviser at Barnsdale Financial Management, Scott Taylor-Barr, states, "We deal with a lot of barristers, and it can be a real issue for them."

"They are required to pay taxes and then prepay taxes on earnings that they have billed for this year, even though they might not see the money in their bank accounts for years to come.

Financial flow.

No matter how early I begin my tax return, the erratic earnings and invoicing problems can make it challenging to begin budgeting for on-account payments.

Therefore, it seems unjust to keep funds locked up with HMRC for six months when I could use them to fund my own expenses or even for personal expenses.

The managing director of Yellow Brick Mortgages, Stephen Perkins, emphasizes that you do not pay taxes before receiving other types of income, nor do you receive interest on the prepayment.

According to him, "you have to save twice the normal amount of tax in the first year of self-employment to not be caught out by this."

The fact that HMRC has no faith in self-employed people is evident. After they have declared their income, give them a deadline to pay their tax bill.

"The individual must plan for the bill and save their taxes; HMRC cannot compel them to pay in advance. It should be abandoned since it is an unfair taxation scheme.