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The extension of the Self-Employment Income Support Scheme (SEISS) has been welcomed by many and will support small businesses until the end of the tax year. Although 2020-21 Self-Assessment returns are not due until 31 January 2022, it is worth looking at the taxation of the grants received and how this will affect your tax liability.
Key details to be aware of
SEISS grants are classed as taxable income and are therefore subject to Income Tax and Class 4 National Insurance Contributions. This income will also be factored into an individual’s eligibility for universal credit, the level of student loan repayments collected through Self-Assessment, and the calculation of 2021-22 payments on account.
The grants received will need to be included in full in the 2020-21 tax year, regardless of an individual’s accounting period, which simplifies the system for sole traders. However, dependent on the year-end date, these grants may be included in an accounting period which is relatively unaffected by Covid-19, therefore potentially causing individuals to pay income tax at the higher rates and creating losses in the following accounting period.
A way to mitigate this problem would be to adjust the accounting period so that the grants are taxed in the accounting period which has had a profit reduction due to the pandemic.
If you have any concerns about how receiving SEISS grants will affect your taxable income for the 2020/21 tax year, please do not hesitate to contact us.