Government urged to reconsider tax payment reforms

Concerns have been raised about the government’s plans to collect Income Tax Self-Assessment (ITSA) through PAYE.

It’s thought that this process will not only create a more complex system but also burden taxpayers with cash-flow issues too.

HMRC Income Tax Self-Assessment Consultation

HMRC’s ITSA consultation covers two areas:

• Paying ITSA through PAYE where certain criteria are met.
• Paying ITSA on a more frequent basis directly.

The government says approximately 2.1 million people have sufficient PAYE income to fall within the first category – a further 2.5 million pay ITSA through direct payments on account.

The Chartered Institute of Taxation (CIOT) explains that the key difference from the current system in both cases is that tax payment dates would be brought closer to the time the taxable income is earned.

Tax payments would be based on the most recently submitted tax return.

For example:

If your 2027/28 tax return shows ITSA due at £12,000 and you are paid monthly by your employer, you could see PAYE deductions of £1,000 per month throughout 2029/30.

Concerns Over New Proposals

While the CIOT supports the government’s objective of helping taxpayers to manage their liabilities and avoid tax debt, there are concerns.

Ruth Sadlier, CIOT’s technical officer, explained, “The proposed approach could introduce a new layer of complexity into the tax system, particularly for people whose income changes during the year.

“We are concerned that under these proposals, individuals attempting to update their ITSA estimates or who see changes to the level of their PAYE income could find themselves moved in and out of different payment systems. This could create confusion and the potential for sizeable under or overpayments of tax.

“Those with seasonal businesses or investment returns weighted towards the end of the tax year may even find themselves paying tax before they receive the income, creating cash-flow issues.”

The CIOT suggests that safeguards, clear guidance, a practical mechanism for updating forecasts and a full review of HMRC’s interest charges will be essential if the reforms proceed.

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