At the 2025 Autumn Budget, the Government announced changes to the timing of Income Tax Self-Assessment (ITSA) payments for one group of taxpayers.
From April 2029, HMRC will require ITSA taxpayers with sufficient PAYE income to make ITSA payments through PAYE each payday — likely divided into equal payments through the year.
The Government has recently also issued a consultation on the potential for other groups of ITSA taxpayers, such as self-employed law firm partners, to make tax payments more regularly throughout the year, closer to the point at which taxable activity takes place.
Many OECD countries, including Canada, France, and Australia, already operate systems where tax is paid much closer to the point of earning and HMRC are now focused on earlier collection of tax, which is not a surprise when looking at the road map they set out through Making Tax Digital.
The proposal
The Government is looking to make the change to more frequent payments – either quarterly or even monthly – from April 2029. The payments that will be made will be based upon an individual’s tax liability for 2027/28 albeit allowing for adjustment
to be made if income is expected to be lower, just in the same way as payments on account can be reduced now if required.
The impact for law firms
In the year of change, law firms will be paying on account of their tax for 2028/29 in January 2029 and July 2029 in addition to making payments on account for 2029/30 starting from April 2029. This will effectively accelerate the outflow of cash from the practice.
The Government has recognised this and the consultation suggests that there may be some transitional support in terms of allowing firms a longer period of time in the first period to deal with this. It may be similar to when Basis Period Reform came in in 2023/24 in that firms could elect to deal with the acceleration of tax payments over a maximum of five years which will just finish when the new system comes in! It is probably unlikely that the Government will be as generous this time.
Key challenges
We would expect to see a number of challenges to firms if these proposals are implemented:
- Firms will need to revisit how they reserve for tax to minimise the cash flow pressure of having to make more regular payments. This could also impact the timing of drawings being made to partners
- The impact on working capital would need to be considered to mitigate against any risk that this may pose to the operation of the wider business. A renewed focus on lock up and early invoice raising and collection should be considered
- Firms who borrow to fund tax liabilities may need to consider the timing of payments under the old system for payments on account and how that will interact with the new system. This may be the time to step back and review the whole structure of funding within the practice to ensure it is fit for purpose in the medium term Internal finance teams may face pressure to model tax liabilities more regularly and compliance costs will likely increase.
The consultation ends on 4 August.
Conclusion
The Government is seeking to modernise the tax system, helping individuals manage liabilities more effectively while reducing debt and improving compliance. As stated, there is clearly an ambition by HMRC to start collecting tax earlier and reduce the risk of default.
Some ITSA taxpayers are already experiencing change in relation to reporting income and expenses through Making Tax Digital (MTD), which seeks to move record keeping closer to real time. It is noted, however, that MTD still does not have a confirmed mandatory start date for law firm partners, and it will be interesting to see how these proposals may change this.
As we saw with Basis Period Reform, the impact could be significant if firms fail to plan well ahead for any change.
