Self-employed individuals can currently receive a grant from the SEISS scheme which will cover 80 percent of average monthly trading profits. This will be paid out in a single instalment covering three months’ worth of profits and it’ll be capped at £7,500 in total.
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Rishi Sunak recently extended the scheme and a second and final grant will be able to be claimed in August 2020.
It has been made clear throughout that the grant will be taxable and new draft legislation, which is facing a consultation that closes tomorrow, laid out how the taxation process could work.
Full details of the draft can be found on the government’s website but the consultation description detailed the following: “We are inviting views on the technical effectiveness of this measure, which ensures that grants within the legislation are subject to tax. These grants are treated as income where the business is within the scope of either Income Tax or Corporation Tax.
“The measure provides for a delegated power to make provision about its application to a particular grant scheme.
“It will also give HM Revenue and Customs (HMRC) powers to recover payments to which recipients were not entitled to under the Self-Employment Income Support Scheme or the Coronavirus Job Retention Scheme payment or where a Coronavirus Job Retention Scheme payment has not been used to pay employees, make pensions contributions, pay PAYE or National Insurance contributions.
“HMRC will be able to do this by raising Income Tax assessments or requiring taxpayers to submit a Self-Assessment tax return.”
The Low Incomes Tax Reform Group (LITRG), a charity dedicated to UK tax concerns, detailed that they are worried that recipients of a SEISS grant may not realise that a tax bill will be due.
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The bills themselves could also be substantial.
According to analysis from LITRG, many may have to pay back up to a third of their grant in tax and class four National Insurance contributions.
They went on to detail that grants made to the self-employed and partners in trading businesses under the SEISS scheme are likely to be included in claimants’ 2020/21 Self-Assessment tax returns.
They warned that claimants may not appreciate that income tax and Class 4 National Insurance is due on the grant and payable by 31 January 2022 at the latest, which they fear could lead to people assuming the amount is exempt from tax, particularly as it is described by the Government as a “grant”.
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Victoria Todd, the Head of LITRG, urged those affected to take these tax burdens into account: “Many claimants of SEISS grants might, understandably, use the money as soon as they get it, for example, to catch up on liabilities or to meet essential living costs – but they need to think now about budgeting for income tax and National Insurance on it.”
Further analysis from the charity detailed that the timing of the grants, which have occurred early in the tax year, may mean that affected individuals will need to forecast their total taxable profits for 2020/21 in order to estimate the amount of tax and National Insurance due on the grant.
They highlight that for many, this is likely to be 20 percent tax and nine percent Class 4 National Insurance.
Victoria concluded with a call on HMRC to make the issue more clear with the coming extension: “The Government has announced recently that a second wave of grants will be paid under the scheme in August 2020.
“We urge HMRC to do as much as they can to publicise that the grants are chargeable to income tax and National Insurance, to reduce the risk of people being surprised by higher-than-expected 2020/21 tax bills.”
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