The budget confirmed three measures aimed at reducing tax debt that have been subject to recent consultation. These include:  

• ITSA taxpayers making more frequent in-year payments from April 2029, 
• requiring Direct Debits for VAT and PAYE liabilities from April 2029; and 
• the direct recovery of lower value tax debts from 2029/30. 

These announcements follow hot on the heels of a National Audit Office report that stressed the challenges that HMRC is facing in tackling tax debt. That report highlighted that HMRC estimates that it collects 81.5% of debts less than one year overdue, but just 15% of debts more than two years overdue.  

The budget also announced a further £70m investment over the next five years in HMRC’s existing partnerships with private sector debt collection agencies to collect more tax debt. 

More timely payment of income tax 

The consultation outcome published alongside the budget highlights the change in the government’s proposed approach to more timely payment of income tax. It now intends to make automated in-year payments (such as through direct debit) the default for ITSA taxpayers, with the option for eligible taxpayers to opt-in to payments through PAYE. The changes will take effect from April 2029. 

Previously, the government had planned to require ITSA taxpayers with PAYE income to pay their estimated ITSA liability in-year through PAYE from April 2029. In its response to the consultation, ICAEW raised significant concerns about ITSA payments through PAYE, warning that the measure could cause additional work for employers and cash flow difficulties for taxpayers.  

Further details will be released in 2027, including on: 

• the frequency and timing of in-year payments;
• the safeguards and flexibilities needed for taxpayers facing financial difficulty;
• approach to compliance, including penalties and interest;
• communications and support for customers; and
• detail on how the transition to the new arrangements will work. 

ICAEW will continue to engage with HMRC on these details.  

Direct debits  

The budget confirmed that the government will require businesses to set up a direct debit instruction for HMRC VAT and PAYE return payments unless exempt. The exemptions from this requirement have not been announced, but the consultation outcome says that HMRC officials will work on these with stakeholders. Businesses can use other payment methods to pay their liability before a specified cut-off date and the direct debit instruction will be used to collect any unpaid balances. 

In its representation on the introduction of direct debits, ICAEW expressed concerns that this measure could exacerbate existing problems with HMRC systems, interfere with business controls and systems and cause cashflow difficulties. The consultation outcome acknowledges the concerns raised and that HMRC will work to remedy some of these IT issues, deliver further improvements and review agent services. 

Proposals to tackle lower value tax debt 

HMRC is to proceed with proposals it consulted on over the summer to recover persistent low value tax debts through regular instalments directly from the bank accounts of individuals and companies. It will work with stakeholders until summer next year to design the policy, with a view to introducing enabling legislation in 2028.  

As previously proposed, the policy will apply to long-standing tax debts of up to £5,000 for individuals and £10,000 for companies. Following consultation, protections will be strengthened for joint account holders, including additional notification and objection rights for non-debtors where a joint account is considered for recovery action. The notice period before deductions can begin will also be extended from 14 to a minimum of 28 days, giving customers more time to consider the proposal, seek advice and contact HMRC to discuss alternative arrangements. 

The government is also proposing a new ‘Refund First’ approach as an enhanced safeguard within the policy. Under this approach, customers who object to a deduction would receive a refund while HMRC reviews their case, helping to minimise the impact of any potential error and providing greater reassurance throughout the review process. Access to an immediate refund would be subject to appropriate controls to prevent misuse of this safeguard.