Under government proposals, taxpayers – including sole traders and landlords – who pay at least some of their income tax via PAYE would be required to pay tax due in regular instalments based on estimates throughout the tax year, rather than into the next tax year as is currently the system. [1]

The proposals seek to reform the collection of self assessment payments to collect more automatically through PAYE to reduce the likelihood of late payments or taxpayers falling into tax debt. This means that tax would be collected more frequently and earlier than usual. The consultation also explores the possibility of changing the current payments on account system.

In response to the government consultation, ICAEW said that there were significant concerns over the proposals.

In particular, PAYE is not considered fit for this purpose, the Institute said. Employers, payroll and pension providers are highly likely to incur additional costs and complications collecting more self assessment payments through PAYE. More frequent in-year tax collection via PAYE would require more processing for businesses including more regular tax code changes, leading to increased employee queries, and therefore a likely uptick in HMRC contact, the Institute explained.

Adelle Greenwood, ICAEW Tax Technical Manager, said: “We’ve seen through service performance data that HMRC systems are already strained. Taxpayers and agents are too often waiting in long queues and – for small businesses in particular – this is a burden stemming growth, rather than supporting it.

“Adding more complication to that already heavy administrative burden by mandating regular tax payments through PAYE is an unnecessary complexity for business. The transitional period will be challenging and one factor not being considered right now is the real risk that employees may respond by withdrawing or reducing their economic activity.”

There are also concerns over taxpayer confidentiality, cash flow and the behavioural impact of having more tax deducted via PAYE from non-PAYE income sources and taxpayers’ cash pipeline.

ICAEW said that there is potential value to using the payments on account system to collect income tax for self assessment taxpayers more frequently during the tax year, but no more than quarterly, as a monthly scheme would create a disproportionate administrative burden.

For both consultation options, there should be a transitional period of three years to ease taxpayers into the new system and to avoid wider negative economic impacts, the Institute said.

ICAEW recommended that using data from Making Tax Digital for income tax (MTD) quarterly updates to inform more timely tax payments must remain voluntary for taxpayers. This is because MTD was not designed to facilitate the earlier payment of tax, the profits reported are not tax adjusted, not all income sources are reported quarterly and profits may fluctuate significantly throughout the year for some businesses.

One-off profits from the basis period reform transition should be excluded from any estimates used to calculate any revised payments on account, the Institute added. As 2027/28 is the final year that these profits will be spread, it is essential that they are excluded for estimating the 2029/30 tax liability, because they do not form part of a taxpayer’s usual ongoing profits. [2] [3

ENDS

Notes to editors:

[1] The government consultation notes that, currently, around 12 million people file a self assessment return. Of these, around 7 million have both income tax self assessment and PAYE income, and around 4.5 million have income tax self assessment income only. Approximately 30% of individuals who file a self assessment tax return make payments on account, and the remaining 70% either make a single payment in January following the relevant tax year or have no income tax self assessment tax liability to pay.

[2] Basis period reform, introduced in 2023/24, to move businesses onto a tax year basis from 6 April 2024, created one-off transition profits for some taxpayers.

[3] Payments for 2029/30 will be based on the 2027/28 tax year.

Currently individuals pay tax under income tax self assessment on savings or dividends income, or on profits from activities such as running a sole trade business or renting out property. The tax due is usually paid as a single payment by 31 January, or through two direct payments on account:

• with the first due on 31 January during the tax year and the second on 31 July after the end of the tax year. A balancing payment may be required by 31 January after the end of the tax year where the tax paid through payments on account is less than the final tax liability.