Government plans to collect self-assessment tax through PAYE
25th June 2026
Posted in Articles by Tom Minnikin
The issue
A consultation has been launched on proposed changes to the timing of Income Tax Self-Assessment (‘ITSA’) payments. Under the proposals, taxpayers who also receive employment income or a pension through PAYE could have their Self-Assessment liabilities collected during the tax year through adjustments to their tax code, potentially from 2029/30 onwards. The Government is also considering more regular in-year payment arrangements for other Self-Assessment taxpayers, including sole traders and landlords.
During the transitional period, taxpayers will be hit by two years of tax liability in a single year. Whilst the proposal does not increase the amount of tax due, it would bring forward the timing of payment, in some cases by up to 22 months.
The consultation says that the changes are intended to “make it easier for individuals and households to budget and manage their tax affairs, reduce the effect of ‘bill shock’ and reduce the likelihood of late payment fees and falling into debt”. There will also be those who argue that it is unfair that Self-Assessment taxpayers have significantly longer to pay their tax than those taxed under PAYE.
Example
Jeremy is a farmer who is also employed as a quiz show host receiving a salary under PAYE. Under current rules, Jeremy pays any tax on his farming profits (and other self-assessed income) for a tax year in two equal instalments. The amount of each instalment is 50% of his self-assessment liability for the previous tax year.
For 2026/27 the first instalment is due on 31 January 2027 (being the due date for submission of the 2025/26 tax return) and the second instalment is due on 31 July 2027. Any balancing payment is due on 31 January 2028.
Under the proposed new approach, if the taxpayer has a source of PAYE income, HMRC will estimate their self-assessment liability using the last-filed tax return and require this to be collected via each monthly payslip. Any balancing payment will remain due in the normal way.
In the above example, assuming Jeremy submits his tax return close to the deadline each year, his 2026/27 ITSA liability will be deducted via the TV company payroll in 12 instalments from April 2026 to March 2027, with the balancing payment due on 31 January 2028. The instalments will presumably be based initially on 1/12th of his 2024/25 tax liability until the 2025/26 tax return (not due until 31 January 2027) is submitted.
The consultation says that this forecast can be updated by the taxpayer if circumstances change.
Our view
While measures designed to reduce the UK tax gap are laudable, the proposed changes appear considerably more complex than the current payment on account regime, which is well understood by taxpayers and advisers alike. PAYE codes are difficult enough to understand without introducing further complications.
The consultation also raises several practical questions. For example:
- How will instalments be calculated in practice? If payments are based on the most recently filed return, taxpayers whose income is rising may find that their monthly deductions consistently understate their eventual liability. Equally, there may be a reduced incentive to file tax returns promptly if doing so results in higher deductions during the year.
- How will the system deal with fluctuating PAYE income? In the example above, if Jeremy receives commission, bonuses or seasonal earnings, his monthly PAYE income may vary significantly. Given the limits on deductions that can be collected through PAYE, HMRC may struggle to recover the intended amount each month.
- What happens where profits fall unexpectedly? If Jeremy’s farming business suffers a poor harvest, he could find himself paying tax based on historic income levels that no longer reflect his circumstances. Unless there is an efficient mechanism for reducing deductions and processing repayments during the year, taxpayers may experience unnecessary cash-flow pressure.
This proposal also comes on top of other measures, such as Making Tax Digital, which have increased the burden of compliance for those within self-assessment. These changes – whilst on paper being a good way to accelerate tax receipts – may have a detrimental effect if it harms the UK’s status as a place to do business.
