The government is consulting on plans to change how self-employed small and micro business owners pay their taxes, a move that has been met with strong criticism from business owners who say it is 'the wrong decision' and will 'add complexity' for firms already burdened by red tape.
What the Reforms Entail
In the 2025 Budget, the government announced that from April 2029, Self Assessment taxpayers who also have PAYE income will need to pay towards their Self Assessment tax bill through their regular PAYE payments, rather than waiting until later in the year or until they file their tax return. The Labour Party government believes that paying in smaller, more frequent instalments will smooth out tax payment, support better planning and budgeting, and help taxpayers avoid large, infrequent, and sometimes unexpected bills.
Consultation and Tax Gap Data
The consultation goes live following official data published yesterday showing the tax gap — the difference between what UK tax is expected to be paid and what was actually paid — was 6.4% for the 2024 to 2025 tax year. HM Revenue and Customs (HMRC) collected £865.2 billion in 2024 to 2025, representing 93.6% of all tax due, meaning an estimated £59.2 billion was unpaid that tax year. The tax gap data revealed that Corporation Tax accounts for a 35% share of the total tax gap, with small businesses representing the largest customer group of the tax gap (62%), and around half of the small business tax gap is for Corporation Tax.
Government's Rationale
The government claims the current system is structured in such a way that there is a greater risk of individuals falling into tax debt. For example, approximately 1.1 million Payments on Account were missed in January 2025, with the taxpayer falling into tax debt in 75% of cases, resulting in penalties and interest. Under the proposed system, individual taxpayers with both Self Assessment and sufficient PAYE income will see several key changes: HMRC will use your most recent tax return to forecast your payments; where possible, HMRC will update your tax code, which will determine how much Self Assessment tax is collected through your PAYE income alongside your existing tax on your employment or pension; if taxpayers know their tax will be significantly higher or lower than forecast, they will be able to make their forecasts and in-year tax payments more accurate by contacting HMRC using an easy online form; and taxpayers will file a tax return, as usual, by 31 January following the tax year alongside paying any remaining tax still due.
Impact on Employers
For employers, where possible HMRC will update tax codes that will inform how much Self Assessment tax is to be collected. Employers will also continue to deduct tax from their employees for each pay period. The government has said it would also like to explore the potential for comparable reforms for other Self Assessment taxpayers by increasing the frequency of Payments on Account. For taxpayers, it claims, this would smooth payments across the year, helping them to avoid large, infrequent payments that can be difficult to manage. It says no decisions have yet been made about potential changes to payments for this group of Self Assessment taxpayers.
Business Owners' Response
Speaking to Newspage, Steven Mather, lawyer and director at Leicester-based Steven Mather Solicitor, said: 'Smoothing tax payments sounds taxpayer-friendly until you remember whose cashflow is being smoothed. Small businesses are being asked to hand their money to HMRC sooner, based on a forecast. If HMRC’s forecasts are wrong, small businesses will be the ones chasing refunds or scrambling to top up, and that’s more admin, not less. The promise of ‘support and guidance’ needs to be real, because owner-managers don’t have a finance department to absorb the friction — and getting a response from HMRC right now feels close to impossible.'
