Millions of taxpayers could see the way they pay Income Tax transformed under new HMRC proposals that would replace large self assessment tax bills with monthly deductions.
The plans, currently out for consultation, would affect around seven million people who receive income through PAYE but are also required to complete a self assessment tax return. If introduced, the changes would take effect from April 2029.
Under the proposals, taxpayers would no longer pay their self assessment Income Tax in one or two large instalments each year. Instead, HMRC would estimate their annual tax liability and collect it in equal monthly payments alongside their PAYE deductions, bringing tax payments closer to the point at which income is earned.
HMRC says the move is designed to make tax payments more manageable, reduce tax debt and prevent taxpayers from facing large, unexpected bills. The proposal also aligns with the wider rollout of Making Tax Digital for Income Tax, which is already changing how millions of taxpayers report their income.
However, the transition could prove challenging. During the first year of implementation, some taxpayers may effectively be paying liabilities under both the current and new systems at the same time, creating potential cash flow pressures. HMRC has acknowledged there will need to be an adjustment period as the payment schedules overlap.
The proposals may also present difficulties for people with seasonal or fluctuating incomes. While HMRC says taxpayers will be able to update their income forecasts so monthly payments can be adjusted, advisers have questioned how smoothly this will work in practice.
The changes would also have implications for employers and pension providers. PAYE tax codes may need to be updated more frequently to reflect forecast self assessment liabilities, adding another layer of complexity to payroll administration.
Professional bodies have urged caution. The Chartered Institute of Taxation warned that incorporating estimated self assessment liabilities into PAYE codes could make an already complicated system even harder for taxpayers to understand. Meanwhile, the Association of Taxation Technicians highlighted concerns that more frequent tax payments could create cash flow issues unless taxpayers are given sufficient flexibility to amend estimated liabilities when their income changes.
Alongside the monthly payment proposals, HMRC is also reviewing the current payment on account system, with options including increasing the number of advance tax payments from two each year to three or four from April 2029.
The consultation forms part of the government's broader ambition to modernise the tax system and collect tax closer to real time. HMRC insists the proposals would not increase the amount of tax owed, only alter when it is paid. A consultation is open until 4 August 2026, with any legislation expected to follow ahead of a planned implementation date of April 2029.
