Freelancers and Self-Employed: Important Deadline with HMRC and Increased Interest Charges
Freelancers and other self-employed individuals are at risk of facing significant interest charges from HMRC if they miss the upcoming July 31 tax bill deadline.
HMRC has recently raised its payment-on-account late payment interest rate from 5.5% at the start of 2023 to the current rate of 7.5%.
According to Dawn Register, head of tax dispute resolution at accountancy firm BDO, the current interest rate is the highest we’ve seen in 15 years, and the consequences of this charge can quickly escalate your debt.
Small Firms Account for 56% of UK Tax Gap
The government’s latest report on Measuring tax gaps reveals that small businesses contribute to more than half of the UK tax gap.
Many of the UK’s 4.4 million freelance workers make pre-payments for their income tax in two installments each year, based on their previous year’s earnings.
The first installment, known as the “payment on account,” is due on January 31, and the second on July 31.
If there is still tax to be paid after these payments on account, a balancing payment must be made by midnight on January 31 of the following year.
Freelancers Could Avoid Tax Due to IR35 Loophole
Employers who wrongly classify self-employed individuals as being outside IR35 will be responsible for covering their PAYE and National Insurance. This means that tens of thousands of freelancers may be able to avoid paying any tax at all, according to HMRC.
Failure to make timely payments may also subject freelancers and others to increased scrutiny from the tax authorities.
Stefanie Tremain, a partner at tax and advisory law firm Blick Rothenberg, explains that late payment can raise an individual’s profile with HMRC and may lead to an enquiry into their tax returns.
Can I Adjust the Amount HMRC is Asking for?
You have the option to reduce your payments on account for the next tax year if you anticipate a lower tax liability than the previous year. However, it’s important to note that over-reducing and subsequently underpaying may result in interest charges and penalties from HMRC.
What If I Underpaid My Payments on Account in 2022/23?
If you reduced your payments on account for the 2022/23 tax year, it is essential to review your income for the year, adjust your payments if necessary, and pay any shortfall as soon as possible to minimize interest charges. Remember, interest may have been accruing since January 31, 2023, if the payments were over-reduced.
What Should I Do If I Can’t Make My Payment on Account?
If you are facing financial difficulties and cannot make your payments on account, it’s crucial to reach out to HMRC instead of ignoring the situation. Contacting HMRC will allow you to discuss your position and potentially establish a payment plan, which can help you spread out tax payments over a longer period.
Learn More About Self-Employed Taxes
Find out the latest updates on self-employed taxes, including the recent postponement of Making Tax Digital income tax reporting for millions of small businesses, and the increased income threshold to £30,000 from April 2026.