Plans to collect Income Tax Self-Assessment (ITSA) liabilities more frequently in-year were first announced at Budget 2025 as part of measures to accelerate the collection of income tax. Further details of the proposals were eventually published at Tax Update Day on 23 June this year in the form of a Consultation by HMRC.
With the consultation period now closed, here is an overview of the proposed changes and their potential impact on employers and affected employees.
What changes are proposed?
Individuals filing ITSA returns currently have to make Payments on Account (POAs) towards their next tax bill if they owe:
- More than £1,000 of tax; and
- Less than 80% of their tax liability for the year was paid at source (eg via PAYE).
Under current rules, a first POA is due by 31 January before the tax year in question, calculated as 50% of the tax liability for the previous year. A second POA of the same amount is then due by the following 31 July.
For affected employees, the proposed reforms would see POAs payable monthly instead via PAYE from April 2029. Each payment would be estimated based on 1/12th of the ITSA liability declared on the tax return filed by the preceding 31 January. So, from April 2029, affected taxpayers with ITSA and PAYE income sources would see 1/12th of their estimated ITSA tax liability for 2029/30 deducted from their wages each month, alongside their normal payroll deductions. That estimate would be based on the tax liability from their 2027/28 tax return, which was filed by 31 January 2029.
Affected taxpayers would be expected to update the forecast tax liability if needed, which would feed through to their PAYE code to improve the accuracy of in-year deductions. The amounts paid in-year would then offset the tax liability calculated when submitting their tax return.
Although no legislation is in place yet, the Government seems committed to these reforms going ahead from April 2029 for taxpayers with sufficient PAYE income to allow ITSA tax to be collected in-year. The measures may be extended to taxpayers with little or no PAYE income (including those who are purely self-employed), but plans for this population are less advanced than for employees with ITSA income.
What’s the purpose of the reforms?
According to the Consultation, the changes aim to “ensure that paying tax is straightforward for taxpayers and is paid closer to real time, reducing the likelihood of late payments or taxpayers falling into tax debt.”
Currently, a gap of up to 22 months can arise between a taxable activity starting (eg property rental or a significant side hustle) and the tax on any profits falling due. The Government aims to close that gap in order to reduce the number of people failing to pay ITSA tax liabilities on time.
What will this mean for employees?
Affected employees with ITSA income will need to monitor their forecast tax liability, which underpins in-year collection of tax, and update it as necessary.
The estimated ITSA liability will be two-years old by the time monthly deductions start –deductions from April 2029 will be based on the tax position for the tax year which began on 6 April 2027 (that year’s return having been filed by 31 January 2029). Circumstances may well have changed in the intervening period, for instance an employee who is also a landlord may have sold one of their rental properties since the tax year on which in-year payments are based. Equally, if a tenant moves out during the year in which collections are made, the landlord will need to update their tax forecast accordingly.
Having made the necessary update to their forecast tax liability, the employee will need to check the resulting change in their PAYE code to ensure the revised forecast is reflected appropriately.
A particular challenge will come in the ‘transition year’ when we switch from the current POA rules to the proposed new system. This will see affected employees effectively paying the equivalent of two years' worth of estimated tax within the period from 31 January 2029 to 31 March 2030, which could create financial hardship for some employees.
How will employers be affected?
Employers are likely to see a greater volume of changes to PAYE coding notices as a result of these changes – particularly if, as HMRC envisage, employees make regular updates to their tax forecasts to improve their accuracy.
On a practical level, frequent PAYE coding changes will impact employees’ take home pay, which is likely to lead to more queries from employees as to why their pay has changed.
Additionally, employers whose PAYE deductions do not exceed £1,500 per month can make PAYE payments to HMRC quarterly rather than monthly. If the proposals in the Consultation go ahead, PAYE deductions for employees with ITSA income will increase. This is likely to result in more employers breaching the £1,500 threshold and having to transfer PAYE deductions to HMRC monthly rather than quarterly. This could have cashflow implications, particularly for small employers.
What happens next?
Legislation will be needed to bring about the proposed reforms, which could appear as early as this year’s Finance Bill.
However, the ATT has expressed serious concerns over the proposed reforms, and urged HMRC and the Government not to go ahead with the proposals. In our response to the Consultation, we suggested a range of simpler methods to tackle the minority of instances (one in five, according to the Consultation) where ITSA liabilities are not paid on time.
If the proposals for in-year payment of ITSA liabilities do go ahead as proposed, in the interests of fairness we argued they should be expanded to all ITSA taxpayers who have to make POAs, not just employees. Restricting the measures to those with PAYE income sources seems to be picking on a soft target where an existing income source exists from which tax is already being deducted.
This article reflects the position at the date of publication shown above. If you are reading this at a later date you are advised to check that that position has not changed in the time since.
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