SEISS grants are taxable and are subject to national insurance in the tax years they are received. This brings the first three grants into the tax year 2020/2021, although the profits the SEISS grants substitute for might have been taxed in a later tax year.
This misalignment of taxable income means up to £21,562 in SEISS grants is potentially taxable at higher rates of tax in 2020/2021, although the trading profits may have been meagre since March 2020. This is particularly the case for businesses with accounting dates early in the tax year.
For some traders, having SEISS grants taxed on a cash received basis amplifies the disruption to their usual pattern of taxable income and related tax payments. The result of bunching income together in one year, and potentially very low income in the next year, means that personal allowances could be wasted in the later year and higher rate tax paid in the earlier year.
It may be possible to mitigate or even improve the short-term outcome for clients with accounting dates other than 5 April, by establishing whether a change of accounting date may be beneficial, particularly if there is overlap relief available.
Register for free to continue reading
It’s 100% free and provides unlimited access to the latest accounting news, advice and insight every day. As well as access to this exclusive article, you can:
Liz is a qualified chartered accountant with over 30 years' experience of helping small businesses and individuals with tax and accounts. She publishes an extensive range of client-friendly tax guides on her site cleartaxinfo.online.