The government is exploring plans to require self-employed workers, freelancers, and landlords to pay tax monthly on income they have not yet earned. Under the proposed changes, tax would be deducted each month based on the previous year’s tax return, applying to those earning above an undecided threshold.
Impact on Cashflow and Business Pressures
Zena Hanks, of accountancy firm Saffery, warned: “For the self-employed, this is going to cause huge disruption to cashflow. The principles are sound, ensuring tax is paid closer to income being received, but you can’t predict future income easily.” She added: “It’s all very well HMRC issuing refunds, but taxpayers could have to pay more tax at a time when their business is under pressure.”
Currently, some self-employed workers pay tax twice a year through “payments on account” in January and July, based on the previous year’s tax return. The proposed shake-up would forecast tax liability for the year ahead and split it into monthly deductions.
Example of Monthly Payments
The Telegraph reports that if a worker's tax return showed earnings of £30,000, they could face payments of £290 each month. Joseph Adunse, of tax firm Moore Kingston Smith, said: “You’ll end up with underpayments, or more concerningly, overpayments. Paying tax more frequently when you don’t have cash to hand can be very difficult. PAYE is used for a guaranteed salary, but this income is not the same. Income forecasts could be wildly inaccurate. HMRC is trying to make two very different scenarios seem equivalent.”
HMRC's Consultation and Response
An HMRC spokesman said: “Spreading tax payments more evenly through the year could help taxpayers avoid unexpected lump-sum bills and reduce the risk of falling into tax debt. We recognise that self-employed people and landlords can have fluctuating incomes, which is why we are consulting widely as we want to hear views on how potential reforms could work in practice.”
