What tax and NIC will i owe on the SEISS grants?

Now that we’re into the full swing of preparing 2020/21 Self Assessment Tax Returns, we’ve had a number of clients query their tax bills, which include tax and NIC owed on SEISS grants.

Most of our self-employed clients have been adversely affected by COVID-19 one way or another, with the vast majority having claimed at least one or two SEISS grants during the 2020/21 tax year.

To recap, the first two grants included less onerous eligibility conditions, and arrived when most businesses had genuinely faced a drop in income as a result of the pandemic, and were facing major uncertainty around their trading conditions for the months ahead.

Fast forward to the end of the 2020/21 tax year and we’ve had a few clients with higher tax bills this year than last once the SEISS grants are included, which is often unexpected.

So, what tax and NIC will you owe on the SEISS grants? The grants represent taxable profits and are therefore subject to tax and Class 4 National Insurance at your marginal rates. For most taxpayers that were eligible for the SEISS grants, this means 20% tax and 9% NIC.

Meanwhile, most businesses faced lower business travel costs during 2020/21 as a result of the lockdown restrictions and therefore their taxable business profits weren’t as badly affected as they’d feared when the pandemic first struck. Adding the grants to these profits may then lead to a higher taxable income than the previous tax year and therefore a higher tax bill than normal.

This also has an impact on the payments on account for the 2021/22 tax year, which are based on the 2020/21 tax liability. Upon discussing these payments on account with clients, we are finding that many only claimed the first two SEISS grants, and therefore they expect their taxable profits to return to pre pandemic 2019/20 levels. In this situation we may be able to make a claim to reduce the payments on account accordingly.

We’d advise self employed clients (including partners in partnerships and LLPs) that claimed the SEISS grants to get their information to us sooner than usual this year so that we can give you plenty of notice of upcoming tax bills in January 2022.

It is also worth pointing out that those who claimed the 3rd grant during 2020/21 and have ended up with higher taxable profits than previous years once the SEISS grants are taken into account, may need to consider whether they were eligible for the third grant, which included a more stringent means test referring to reduced profits. The 2020/21 Self Assessment tax return includes new boxes to declare SEISS grants received which don’t meet the criteria, which allows these grants to be repaid as part of your tax bill.