Pay as you go tax could leave freelancers struggling.

IPSE research: “pay as you go” tax would leave freelancers struggling with cashflow and heavy admin burden

New research being reviewed by HMRC shows the idea of monthly or quarterly “pay as you go” tax payments would leave two out of five freelancers (40%) struggling with cash flow.

The research was produced by IPSE (the Association of Independent Professionals and the Self-Employed) in response to an HMRC consultation on the possibility of increasing the frequency of self-employed tax payments.

The research found that nearly three-quarters of freelancers (72%) would struggle with the increased administrative burden if they had to pay tax more frequently. As a result, two-thirds of freelancers (63%) were opposed to paying corporation tax more frequently, and three out of five (57%) were opposed to more frequent income tax payments.

Two out of five freelancers (39%) said paying taxes more frequently would leave them less able to cover unexpected costs, while over a third (34%) feared monthly or quarterly tax payments would lead to hidden HMRC or interest charges.

Another serious problem for many freelancers is where the money would come from: although 75 per cent of freelancers have money set aside specifically for taxes, one in five (19%) would have to use money that’s currently covering their business expenses and almost a fifth (17%) would have to use money currently invested in their business. Another one in ten (11%) would have to divert money that is covering their personal bills and expenses, while 7 per cent have already used the money they would need for taxes to pay off debts.

The research also found that more than two-thirds of freelancers (69%) are opposed to in-year income tax calculation instead of retrospective calculations. For corporation tax, this rose to 76 per cent.

At present, 44 per cent of freelancers pay income tax once a year, 39 per cent pay twice a year and 14 per cent pay more than twice a year. Given the choice, 45 per cent want to pay annually, one in six (16%) want to pay twice a year, one in five (20%) would prefer to pay quarterly and another one in six (16%) want to pay monthly.

Andy Chamberlain, Director of Policy at IPSE (the Association of Independent Professionals and the Self-Employed), said: “HMRC is consulting on possibly making self-employed tax payments – income and corporation tax – more frequent. Some freelancers can see benefits to this proposal: 42 per cent of sole traders and 30 per cent of company directors felt it would reduce the stress of paying a large tax bill. On the whole, however, it seems freelancers think this would be much more hassle than it’s worth – and could even leave many out of pocket.

“The biggest worry across the board is admin burden: unsurprisingly, most freelancers think they would struggle with having to go through the already arduous process of self-assessment every month or even every three months. This is, quite simply, a time when they could be making money.

“Another big worry for freelancers is that this would create a real financial strain for them. For a proportion of freelancers, paying taxes more regularly would force them to divert money from their businesses and even from paying their bills.

“The reality is more frequent payments would mean freelancers had to face not just one tax deadline, but four or even twelve: many fear the inevitable bumps in the road of freelancing would mean they would miss one and find themselves hit with fines and interest. Overall, there is a sense among freelancers that more regular tax payments are too much risk and hassle for too little reward.”

Article by IPSE

IPSE, the Association of Independent Professionals and the Self-Employed, is the only dedicated representative body for the UK’s self-employed community, including freelancers, contractors, consultants and independent professionals.