Usually, self-employed workers who file annual Self-Assessment forms must also make two ‘payments on account’; one in January and one in July.

Unlike PAYE employees, the self-employed are expected to pay tax in advance towards the current year’s bill which can be difficult to forecast and can be larger than expected.

But, as a Covid-19 emergency measure, the government announced that taxes due in July 2020 could be deferred to January 2021.

And these payments could be spread over 12 monthly instalments, though the self-employed will have to pay interest of 2.6% on all outstanding tax from 1 February 2021.

Despite the measures, many self-employed will still have to settle tax bills which bear no relation to coronavirus-ravaged earnings, according to mutual Royal London.

It added that the system is ‘incredibly complicated’ while the onus is on the self-employed to sort this out themselves.

The table below explains why the self-employed will need to pay some of their tax bill in advance and an extra payment on account:

More than 2.7 million people have so far claimed financial support under the government’s Self-Employment Income Support Scheme (SEISS).

According to IPSE, the average drop in freelancer income was more than 30% in the first half of 2020 but some have reported that their regular income has completely disappeared.

Royal London calculations on these figures suggest that if a self-employed person who previously earned £50,000 saw a drop in income to £15,000, their total tax bill next year would be £16,682 to cover 2019/20 as well as 2020/21 payments on account, despite their annual earnings having dropped to less than this amount.

The mutual insurer is urging self-employed people who may not know that they can ask for their payments on account to be reduced, or that they can spread out their payments, to contact HMRC and make sure they are not over-paying tax. Most of this is done online and falls under ‘Time to Pay’ arrangements. Those who think they have overpaid can claim a refund but this can take weeks to process.

‘Doesn’t go far enough’

Mona Patel, consumer spokesperson, said: “Many self-employed people may be expected to pay more in tax than they have actually earned in the past year because of the payment on account system.  This lack of ‘real world’ tax bills means it’s perfectly feasible that those who have suffered the steepest drops in income could find themselves in this situation.

“While the Revenue has announced a system that enables people to pay in more manageable instalments, this still doesn’t go far enough for those who could end up overpaying tax unnecessarily because their bill is based on last year’s earnings. We urge HMRC to do the right thing and help the self-employed understand their options.”