HMRC is preparing to collect billions of pounds in tax by the end of the month as the self-assessment deadline looms for the self-employed.
For many taxpayers, the rules governing how and when tax is paid could result in a shock bill that is far higher than anticipated.
Self-employed workers across the UK are approaching a tough tax deadline at the end of this month, with some people facing bills far higher than they expect.
Anyone who works for themselves must submit their self-assessment tax return and pay what they owe by January 31.
However, HMRC rules mean many people are also asked to pay part of next year’s tax bill in advance at the same time.
This system, known as payments on account, can be especially hard for those filing for the first time. In some cases, new self-employed workers may be asked to pay 150 per cent of their tax bill in January, followed by a further 50 per cent payment in July.
Robert Salter, Director Global Mobility at Blick Rothenberg, explained the distinction between the two obligations: “Self assessments tax returns are the income tax return filings, which taxpayers need to complete where they are, for example, self employed or have income or capital gains.”
He added: “Payment on Account are the advance tax payments which one needs to make for future tax years and are innately based on the tax underpayment that arose for a taxpayer’s last set of filed accounts.”
New self-employed workers may be asked to pay 150 per cent of their tax bill in January, followed by a further 50 per cent payment in July
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GETTYThese advance payments are worked out using the previous year’s tax bill as a guide, which can catch people out if their income has changed.
Salter advises self-employed workers to remember that client payments are made before any tax is taken off, so a portion should always be set aside to cover income tax and Class 4 National Insurance.
The self-assessment system is designed to stop people falling behind on their tax or spending money that should be saved for HMRC.
It is meant to mirror the Pay As You Earn system used by employees, by spreading tax payments across the year rather than leaving everything to one deadline.
Significant changes loom on the horizon for higher-earning self-employed individuals and property landlords
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GETTYHowever, the system assumes earnings stay roughly the same year to year. For freelancers and contractors whose income rises and falls, this can lead to tax bills that feel out of step with what they are actually earning at the time.
Significant changes loom on the horizon for higher-earning self-employed individuals and property landlords.
From April 2026, Making Tax Digital for income tax will come into force for those with gross turnover of £50,000 or above from self-employment or letting activities.
Those affected by the new rules will be required to submit digital updates every three months, setting out their income and expenses, followed by a final annual declaration.
While this adds to the paperwork, the more regular reporting is intended to give people a clearer picture of how much they are earning and what tax they are likely to owe as the year progresses.
The income threshold for these requirements is also due to fall in the coming years, meaning a growing number of self-employed workers will eventually be brought into the system.