Timely Payment of Income Tax: What the Proposed Changes Mean for You

The government has recently launched a consultation on changing how Income Tax Self Assessment (ITSA) is paid. The proposal is to move towards more frequent, in-year payments, rather than the current system of twice-yearly instalments.

While this won’t take effect until April 2029, it represents a significant shift, and one that’s worth preparing for now.

What’s changing?

Currently, most Self Assessment taxpayers choose to pay tax on non-PAYE income in large lump sums:

• 31 January (balancing payment and first payment on account)

• 31 July (second payment on account)

This means tax can be paid long after the income is earned and sometimes with a delay of up to 22 months.

Under the proposed new system:

• Those with employment or pension income will have payments collected automatically through PAYE each payday

• Payments will be based on a forecast of your tax bill based on a previous year’s income, with a final adjustment when your tax return is submitted.  For the year from April 2029 this is likely to be based on your income for the year to 5 April 2028.

Importantly, this does not increase the amount of tax you pay, it simply changes when you pay it.

It does mean, if your income is not regular, particularly if this is weighted towards the end of the tax year, you could be paying some of the tax liability before the income is received.

Changes in your circumstances could mean the payments are significantly different to the actual tax liability for the year.

There should be the option to submit updated estimated forecasts for the year but it is unclear whether these would need to be before the start of the year or at anytime before the year ends.     

Who is most affected?

The initial changes will mainly affect individuals who have:

• PAYE income (such as a salary or pension), and

• Additional income reported through Self Assessment

Further reforms for those without PAYE income (e.g. fully self-employed individuals) are also being considered.

The key challenge: the transition year

The biggest impact for clients is likely to come during the transition into the new system.

Because we are moving from a “pay later” system to a “pay as you go” approach, there will be a period where payments overlap.

An example

If your typical tax bill is £12,000 per year, you might currently pay:

• £6,000 in January

• £6,000 in July

Under the new system, from April 2029 you may also begin paying your next year’s tax in real time. This means that, during the transition, you could be paying:

• Existing payments under the current system, plus

• New in-year payments for the following tax year

In effect, you may temporarily pay significantly more tax in cash terms than usual, even though your overall liability hasn’t increased. For some, this could feel like paying 150% or more of a normal year’s tax in a single year.  It may be some transitional relief is put in place to reduce the impact.

What should you do now?

Although the changes are still a few years away, there are practical steps you can take now.

1.      Build up a tax reserve

Start setting aside money regularly for your tax bill, rather than relying on January and July payments.

2.      Move to monthly saving

A helpful approach is to divide your expected annual tax bill into monthly amounts and save this consistently. This mirrors how the new system will work.

3.      Use HMRC payment plans

HMRC’s Budget Payment Plans already allow you to make voluntary weekly or monthly payments towards your tax bill.

4.      Monitor your income

Because future payments will be based on forecasts, keeping track of your income throughout the year may become more important.

5.      Be prepared for cash flow changes

If you pay tax through PAYE in future, your take-home pay may reduce as additional tax is collected automatically.

Our view

Paying tax more regularly should make things simpler in the long term for those who struggle to budget for future payments. However, the transition period will require careful planning, particularly for those with larger or fluctuating incomes. It also further differentiates between the timing of tax payments for those within the PAYE system and those outside of it.

The key message is to start preparing early. Building up reserves now and getting used to regular payments will help smooth the impact when the new system is introduced.

If you’d like help understanding how these proposals could affect you, or support in planning ahead, please get in touch.