As a result of COVID-19, many self-employed people will be worried about how they're going to pay their tax bill. You may have skipped your July tax payment - as you were allowed to - but will now face a double bill in January. And you may have had to dip into the savings that were earmarked to pay your tax bill in January.

Finally, unless you take action, HMRC’s January tax bill will assume that your earnings in the 2020/21 period will be the same as in 2019/20, even if your income hasn’t been anything close to the same. 

In this article, I will highlight some of things you can do now to avoid being stung for your tax bill in January. As a taxman turned software developer, I can provide insider's advice that works with HMRC, not against them.

Of course, accounting varies considerably depending on your individual circumstances. If you are unsure, it’s always best to pay for professional advice or use HMRC-recognised software to complete your tax return.

With that disclaimer out of the way, here are some ideas on how to manage your tax burden...

1) Don’t worry about declaring your Self-Employed Income Support Scheme grant yet

If you’ve claimed the Government’s Self-Employed Income Support Scheme (SEISS) grants, this counts as taxable income. BUT don’t worry about it for the tax return that’s due by 31st January 2021, as this covers the 2019/20 tax period.

Make sure you keep a record of the amount claimed and the claim references, as you’ll need them next year. 

If your income has been reduced this year, you may be eligible to claim the second round of grants before the October 19th deadline. The process is fairly quick and simple. The Government has just announced that they will be providing two further grants for the period from November through April 2021, although these will be for reduced amounts.  

For more information and to apply, click here.

2) Ask HMRC to reconsider your payment on account

Your January tax bill includes an advance payment for the 2020/21 tax year (the current tax year). This is called a ‘Payment on Account’. They estimate this using your income for 2019/20.

If you are worried about your payment on account because your earnings dropped considerably this year due to COVID-19, you can ask HMRC to reconsider the amount. 

So, for example, if you earned £30,000 in the 2019/20 tax year but only expect to earn around £20,000 in the 2020/21 tax year, you can contact HMRC to request a reduction on your payment on account.

To request a reduction in what you need to pay in January, log in to your HMRC online account. You can find detailed instructions here.

The earlier you file your latest tax return, the more time HMRC will have to consider your request and the higher the chances of having a reduction provided before the January 31st deadline.

3) Ask HMRC for more time to pay

If you discover that you really cannot afford to pay your tax bill come January, the Government has just announced you can agree a payment plan with HMRC. This allows you to pay in installments and get up to 12 months extra ‘Time to Pay’. 

For more information and to get in touch with HMRC, click here.

The payment plan can cover:

• The payment on account that was due in July 2020 (for 2019/20 tax year)
• The balancing payment due by 31 January 2021 (for 2019/20 tax year); and
• The payment on account due by 31 January 2021 (for 2020/21 tax year)

If you are thinking of asking HMRC for a payment plan, it’s always better to contact them as soon as possible. They get very busy in January and it can take several weeks to set up installments, which means you may miss your payment deadline.

4) Get ongoing estimates of your tax liability

Of course, the best way to ensure you aren’t stung for tax is to keep up-to-date records of your income and expenses and regularly put money aside for your tax bill. By keeping on top of your bookkeeping you will get a better understanding of how much money you’re really making. 

Estimating your tax liability in real time can be tricky and requires up-to-date information. If you use an accountant or tax advisor, speak to them about how to manage this process, when they need information by, and the cost for managing this process.

If you complete your own tax return, or want to in future, you may want to consider using new digital accounting software. Over the next few years, self-employed people will have to submit their tax returns digitally using compatible software as part of HMRC’s Make Tax Digital (MTD) regulations.

However, you can start using MTD accounting software now to keep track of your income and expenses, with some software, like APARI, providing real-time tax calculations and estimates based on current information, giving you even more predictability over your tax liability. You can find the full list of software here.

With COVID-19 continuing to disrupt businesses, 2020 is proving a challenging time for self-employed people. However, between government grants, deferred payments, and a range of other support measures you should be able to make your upcoming tax bill more affordable.

And by keeping on top of your accounts, either through your accountant or software, you can make your tax liability more predictable and manageable, as well as prepare for upcoming Making Tax Digital (MTD) regulations.