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UK Chancellor John Healey has announced plans to accelerate income tax collection from millions of self-employed workers, with the government expecting the changes to generate more additional revenue than its temporary increase in taxes on banks.
Under measures included in the October 28 UK Budget, sole traders and other taxpayers using self-assessment would move towards regular tax payments during the year in which their income is earned, rather than paying through the existing system of instalments based largely on previous-year liabilities.
- More than 3 mn self-employed workers could face monthly income tax payments from April 2029, replacing the existing system of instalments based on previous-year liabilities.
- The Office for Budget Responsibility forecasts a £17 bn withdrawal from self-employed taxpayers’ cash balances in 2029-2030 as payments for previous and current tax years overlap.
- The Treasury expects the reform to raise £1.3 bn in 2029-2030 and £1.8 bn by 2031-32 through improved compliance and reduced tax debt, although experts warn of significant cash-flow pressures.
The changes, scheduled to take effect from April 2029, could affect more than 3 mn self-employed workers. The Office for Budget Responsibility (OBR) estimates they will result in a £17 bn cash withdrawal from taxpayers in 2029-30 as payments relating to previous and current tax years overlap.
Tax specialists have warned that the transition could create substantial liquidity pressures, particularly for businesses with seasonal earnings or profits that fluctuate considerably throughout the year.
The Treasury forecasts that the policy will raise £1.3 bn in 2029-30 through improved compliance and lower tax debt, increasing to £1.8 bn by 2031-32. By comparison, the temporary increase in the bank corporation tax surcharge is projected to generate £1.5 bn.
The measure forms part of Healey’s broader effort to improve tax collection and reduce the gap between liabilities owed to HM Revenue & Customs (HMRC) and the amounts actually received. HMRC bank account access powers could expand to recover unpaid tax debts in the UK.
UK self-employed tax reforms could create £17 bn cash-flow squeeze
The proposed system would require self-employed taxpayers to make more frequent payments throughout the tax year, bringing their obligations closer to those of employees whose income tax is collected automatically through payroll.
Currently, people filing self-assessment returns generally settle their tax liabilities after the income has been earned. Those required to make payments on account typically pay instalments on January 31 and July 31, each representing 50% of the previous year’s tax liability.
Any remaining amount is normally due on January 31 following the end of the relevant tax year. Depending on when income is earned, the existing arrangements can leave a gap of up to 22 months before the final tax payment becomes due.
The government’s proposed approach would move collection into the same year as the income arises, with monthly payments replacing much of the existing timetable.
The transition presents a particular challenge. From April 2029, affected taxpayers could have to meet outstanding liabilities from an earlier tax year while simultaneously making payments towards their current-year obligations.
According to the OBR, that overlap would transfer approximately £17 bn from self-employed taxpayers to HMRC during 2029-30, providing the Treasury with a substantial one-off cash-flow benefit.
The £17 bn figure represents an acceleration of tax payments rather than an equivalent increase in taxpayers’ underlying liabilities.
In an August consultation, HMRC reported that approximately 30% of the UK’s 12 mn income tax self-assessment taxpayers make payments on account. That places up to 3.6 mn people within the potential scope of the reforms.
Self-employed workers account for approximately 13% of the UK workforce.
HMRC aims to reduce the £59 bn UK tax gap
The accelerated payment timetable is intended to address weaknesses in the existing collection system, particularly when taxpayers spend funds that should have been reserved for future tax liabilities.
Under current arrangements, businesses and individuals can receive income long before HMRC collects the associated tax.
If a taxpayer experiences financial difficulties before payment becomes due, HMRC may struggle to recover the outstanding amount. Where a business enters liquidation, some tax liabilities may never be collected.
Earlier collection could reduce these exposures by shortening the interval between receiving taxable income and paying the government.
HMRC estimated the UK’s tax gap at £59 bn for 2024-25, equivalent to 6.4% of the tax it expected to receive. Nearly two-thirds of the shortfall was attributed to small businesses.
The government projects that measures to modernise tax administration and reduce the tax gap will generate £2 bn in additional revenue during 2029-30.
The Budget also includes plans to recruit another 670 HMRC compliance officers by 2029-30. The Treasury expects the additional staff to raise £260 mn, equivalent to almost £400,000 per officer. These revenue projections remain uncertain, according to the OBR.
The government has yet to explain how the transition to more frequent payments will be managed or provide details of the methodology behind its revenue forecasts.
Seasonal businesses face higher tax payment pressures
Tax specialists have identified seasonal income patterns as one of the principal difficulties with collecting income tax monthly.
Many self-employed businesses generate a disproportionate share of annual profits during particular periods, including the Christmas trading season.
Under the existing arrangements, those businesses may receive most of their annual income before their corresponding tax obligations become payable.
Regular payments based on estimated annual earnings could instead require funds to be transferred to HMRC before the expected revenue has been received.
Accountants warn of financial pressure during the 2029 transition
Lubbock Fine warned that individuals with fluctuating incomes and substantial annual tax liabilities could be particularly exposed to the proposed timetable.
Lawyers and accountants are likely to be among the hardest hit because the amount of tax they pay each year can be significant, but the changes will also affect lower earners and other self-employed people as well as those with significant savings income.
The potential consequences extend beyond professional services. Sole traders and smaller businesses with limited cash reserves could face difficulties meeting accelerated liabilities alongside their operating expenses.
Giving people more time to prepare would allow them to gradually bring their payments forward and avoid them running out of cash in 2029. A phased introduction may also be appropriate.
Tax experts have also called for greater clarity over how monthly liabilities would be calculated, particularly when actual income differs from forecasts.
The Treasury has not yet detailed how it intends to prevent the transition from creating excessive financial pressure on businesses or how adjustments would work for taxpayers whose earnings fluctuate.
The proposed reform would give HMRC earlier access to income tax receipts and potentially reduce outstanding tax debt. Its financial consequences for self-employed workers will depend heavily on the final payment rules and whether the government introduces transitional arrangements to spread the £17 bn acceleration of tax collection.
