More timely payment in Income Tax Self Assessment (ITSA)

 HMRC are consulting on proposals for the more timely payment of tax due under Income Tax Self Assessment (ITSA). The consultation seeks views on:

• The proposed design of the reforms for taxpayers within ITSA who have PAYE income and who will be required to pay their forecasted ITSA liability in year from 6^th April 2029.
• The potential for more timely payment for other taxpayers within ITSA such as those who only income is taxed under self assessment.
• Specifics of the design, such as how and when payments would be collected and the safeguards needed to support taxpayers and the support and guidance needed for taxpayers and their representatives to help them move over to the new payment regime.

Background

In September 2021, the then government published a call for evidence which looked at the benefits and challenges in relation to both the current payment timings under Self Assessment and a move to more frequent payments. Respondents acknowledged that some taxpayers may benefit from a move to smaller, more frequent payments but warned that there was no size fits all approach.

Some four years later at the time of the 2025 budget, the government announced that from April 2029 taxpayers with sufficient PAYE income would make payments on account towards their self assessment bill in year with payments being made each pay period.

Current timings

Taxpayers within self-assessment must pay their tax and any Class 4 National Insurance contributions by 31^st January following the end of the tax year.

Where the taxpayer’s self-assessment tax and Class 4 National Insurance bill for the previous tax year is £1,000 or more, the tax payer is required to make payments on account towards their current years bill unless at least 80% of their tax liability for the year was collected at source (for example, under PAYE). Each payment on account is 50% of the previous years tax and Class 4 National Insurance bill. Payments on account must be made by 31^st January in the tax year and by 31^st July after the end of the tax year. If the payments on account do not cover the bill in full, the balance must be paid by 31^st January after the end of the tax tear. If the payments are more than the final bill, the excess can be refunded or put towards the next payment on account.

If a taxpayers circumstances change and their tax bill for the current year is less than for the previous year, they can elect to reduce their payments on account. However, if they reduce the payments on account by too much, interest is charged on the shortfall.

Where the taxpayer files their return by 30^th December after the end of the tax year and has PAYE income, the tax that they owe will be collected through PAYE via an adjustment in their code, unless they opt out. In this way, the payments are made in monthly instalments, but in arrears. Currently this is optional.

Where a taxpayer does not have a sufficient PAYE income source or opts not to pay in this way, payment is made by the taxpayer direct to HMRC.

Rationale for change

Under the current payment regime there is a lag between earning the income and paying the associated tax. Further, as the payment is made in two instalments, taxpayers may face ‘bill shock’ especially where they have not put money aside to meet their tax bill. This may mean that they are unable to pay their tax bill in full and on time, incurring interest as a result. Moving to smaller, more frequent tax bills may help many taxpayers to meet their tax obligations in a timely manner.

Moving to more frequent tax payments does not only help taxpayers to manage their tax bills, it also benefits HMRC as they will receive the money sooner.

Taxpayers with PAYE income

Taxpayers who owe tax under self assessment and who have sufficient PAYE income can choose to pay their tax through PAYE via an adjustment to their tax code as long as they have filed their tax return by 30^th December after the end of the tax year. Currently, this is optional and the taxpayer can instead pay their tax direct to HMRC.

From April 2029, taxpayers within self assessment who have sufficient PAYE income will make ITSA payments through PAYE each payday. The predicted liability will be based on the taxpayers last completed return. Taxpayers will be able to update the forecast as information becomes available to ensure that it remains an accurate reflection of their liability. In this way, the current years tax will be collected in instalments in the year to which it relates.

Transition year

During the transition year, taxpayers may be paying tax for more than one year as payments will move from being made in arrears to being made in the current tax year.

For example, a taxpayer may have their 2029/30 tax collected through PAYE and also be required to make the second payment on account for 2028/29 by 31^st January 2029 and any balancing payment for 2028/29 by 31^st January 2030. If a taxpayer has opted to have their 2027/28 tax collected through PAYE, they will. Have adjustments in their 2029/30 code for both their 2027/28 tax bill and also their 2029/30 tax bill.

Although there will be no change to the amount of tax that the taxpayer has to pay, the taxpayer may face cashflow difficulties in the transition year. The government are considering options for supporting taxpayers during this period, including the option of spreading payments for the previous year over a longer time frame or offering advance payment options.

It is important that taxpayers plan ahead for this change and put money aside each year to pay that years tax.