Taxpayers urged to prepare as Government considers overhaul of Self Assessment payments

People who complete Self Assessment tax returns are being urged to start planning ahead following Government proposals that could fundamentally change when Income Tax is paid.

The Government has launched a consultation on plans to move Income Tax Self Assessment (ITSA) towards more frequent, in-year payments rather than the current system of two instalments each year. While the proposed changes would not come into effect until April 2029, tax specialists at Simpkins Edwards say now is the time for taxpayers to understand what the reforms could mean.

Tax Partner David Shearer said: "This represents one of the biggest changes to Self Assessment in many years. Although it won't increase the amount of tax people pay, it could significantly change when they pay it, with important cash flow implications for many individuals."

Currently, most Self Assessment taxpayers pay tax on non-PAYE income in two instalments on 31 January and 31 July. In practice, this can mean tax is paid many months after the income is earned.

Under the proposals, people with employment or pension income would have payments collected automatically through PAYE each payday. Payments would be based on a forecast of the year's tax liability using previous income, with any adjustments made once the annual tax return has been submitted.

David explained: "For people with fairly stable incomes, paying tax more regularly may make budgeting easier. However, anyone with irregular earnings, particularly where income is received later in the tax year, could find themselves paying tax before they have actually received that income."

There are also unanswered questions around how changes in income during the year would be reflected. While it is expected taxpayers would be able to update income forecasts, the Government has yet to confirm exactly how and when this would happen.

Initially, the proposals would have the biggest impact on people with PAYE income, such as salaries or pensions, who also complete Self Assessment returns. Further reforms for those without PAYE income, including many self-employed individuals, are also being considered so these become more regular and at an earlier time.

According to Simpkins Edwards, the biggest challenge is likely to come during the transition to the new system.

"If your annual tax bill is typically £12,000, you currently pay £6,000 in January and £6,000 in July. Under the proposed system, you could also begin paying towards the following year's tax at the same time. That means, in cash terms, some people could temporarily pay significantly more than they are used to, even though their overall tax liability hasn't increased.

"Some taxpayers could feel as though they are paying 150 per cent or more of a normal year's tax during the transition, although we hope some form of transitional relief will be introduced to ease the impact."

Although the proposals remain under consultation, Simpkins Edwards recommends taking practical steps now, including building a tax reserve, saving monthly rather than relying on lump sums, making voluntary weekly or monthly payments through HMRC payment plans, monitoring income carefully and preparing for potential cash flow changes.

David added: "Paying tax more regularly should make things simpler in the long term for people who struggle to budget for large payments. However, for those with larger or fluctuating incomes, the transition will require careful planning.”

He says that it’s important not to wait until the last minute. “Looking at the experience of Making Tax Digital, indications suggest that more than half of those required to register have yet to do so, despite having had plenty of notice. Planning ahead is key. By familiarising yourself with these latest proposals now, either independently or with the support of your tax adviser, you'll be well prepared should the changes be introduced.”