Every month, HMRC quietly publishes policy papers and consultations that could reshape how the self-employed people or small businesses might pay their tax. While technically public for all to see, in practice few people in business will ever actually find and read them (apart from diligent accountants like us!).
The key aim of these policy paper consultations is to gather thoughts, concerns, and challenges from businesses affected by the proposed changes. However, in our experience, the people most affected often don’t give their opinion, usually because they don’t know about the consultation in the first place!
So, in this article we’ll walk you through the information and implications of one current policy paper, and how the consultations might impact on how you pay tax as a self-employed person or small business owner.
But first, an example of how a lack of response to a consultation to changed tax legislation almost without anyone noticing.
Profit and loss on public record
A few years ago, a similar consultation proposed that small, limited companies should publish their entire profit and loss account online. That would mean details of how much they sold, where they spent their money, and how much profit (or loss!) they made would all on the public record for everyone to see.
The people HMRC consulted weren’t really affected, so they responded that it was a good idea or at least wasn’t a bad one. So it sailed through parliament, and caused a right mess. Only recently has it been reversed, after sustained campaigning from groups including the Federation of Small Businesses and campaigners such as our own Dan Heelan.
So when new consultations appear, we strongly encourage our clients (and our readers) to respond with their views as these new consultations affect every self-employed person and small business in the country.
Simplification, modernisation and fairness
HMRC’s policy paper, “Tax Update 2026: simplification, modernisation and fairness summary” outlines the direction HMRC wants to take the tax system. This includes three key changes:
- The annual tax bill for dividends or a sole trader business could be collected monthly through your day job, or have to be paid monthly.
- More people could be dragged into paying tax upfront.
- You could be forced into paying VAT and payroll by Direct Debit.
In case you want to jump straight into the nitty gritty, here are the links:
“Tax Update 2026: simplification, modernisation and fairness summary”
“Timely Payments in Income Tax Self-Assessment”
1. More Timely Payments for Income Tax Self-Assessment
The current red-hot consultation is “Timely Payments in Income Tax Self-Assessment.” HMRC is consulting about changing how Self-Assessment taxpayers (ITSA) pay their tax from April 2029.
“The government wants to ensure that paying tax is straightforward for taxpayers and is paid closer to real time, reducing the likelihood of late payments or taxpayers falling into tax debt.”
In the UK 12 million people filed a tax return in 2024-25, and around 20% (2.4 million people) paid late.
Payments on account
Payments on account is basically paying tax in advance. Many self-employed clients are familiar with the January and July payments. However the first time you pay this, it can come as a massive shock as the bill covers an entire tax year plus a possible 50% payment on account for the year ahead. HMRC themselves even use the phrase “bill shock” to describe this!
To address bill shock, HMRC is proposing two changes:
-
- If you have any PAYE income or a private pension alongside self-employment income, HMRC would deduct an estimate of the tax due on your other income directly from your PAYE income each month, from April 2029.
- If you’re fully self-employed with no other income, HMRC would collect an estimated amount monthly or quarterly, based on your last tax return.
This is a massive change. The current UK system gives you up to 22 months between earning money and paying tax on it (most countries give around 3 months).
-
- That’s good for cashflow, for business growth, and for those with irregular or seasonal income.
- It’s not so good if you can’t (or don’t) budget well for an ever-building tax.
Safeguards are being discussed, including a cap on how much could be deducted from job income (currently suggested at 50%).
Spreading tax payments
Spreading your payments out is, in principle, a sensible approach to avoiding large tax bills. You can already do this voluntarily via direct debit or just make regular tax payments directly to HMRC at any time.
Making it mandatory doesn’t give the flexibility required for small businesses who have variable, or seasonal income. Paying a set tax bill each month would be a cashflow challenge as these numbers are based on last year’s profits.
Making Tax Digital (MTD) should give HMRC a real-time view of profits, but year-to-date profit figures can be distorted by timing differences, later adjustments, seasonal trading, one-off costs, tax reliefs and other accounting factors. Having two payment points a year, rather than twelve, currently gives more breathing room to manage variable income.
2. A Lower Threshold for Payments on Account
The second proposal is about when individuals or businesses are brought into the payments on account system. Currently, you make payments on account if:
- Your tax bill is over £1,000
and
- Less than 80% of your tax is already collected at source
Most moderately successful self-employed people, or company directors taking dividend, already sit above this threshold.
HMRC are considering lowering this threshold further, which would pull even more people into monthly or quarterly payments. Given how low the current threshold already is, there isn’t much room to move without affecting a large number of smaller businesses.
3. Mandating Direct Debit for VAT and PAYE
The third proposal, with its own separate consultation, is that VAT and PAYE must be paid by direct debit.
In theory, it all sounds sensible and logical.
- Submit your return
- HMRC takes the correct amount automatically
- Your payments are never late
You can already do this voluntarily, as some of our clients do for VAT already. However, it puts your business at the mercy of HMRC’s systems, which can (and do) get things wrong, particularly with PAYE. Heelan Associates currently have a client with an issue that’s been unresolved for over two years.
Also, many business owners would feel deeply uncomfortable with the risks of handing any government department the ability to pull money directly from their bank account. If HMRC takes the wrong amount, it could take a remarkably long time to sort out, affecting your cash flow to pay your employees and suppliers.
There’s also a contradiction here.
- Businesses are rightly expected to pay tax on time.
BUT
- Parliament has introduced Small Business Protection legislation precisely because late payments to small businesses is a big problem. Late payment of tax already carries fines and interest. Removing the business’s ability to manage the timing of payments feels like a different kind of risk entirely.
There’s also a practical question of whether all this actually helps HMRC, as there are some obvious workarounds in a scenario where mandating of direct debits comes into force.
Have your say on tax in the UK
Remember, HMRC is actively asking for feedback on these proposals before anything is finalised. If this could affect you, please do respond, as every submission counts.
You can find the consultation documents at the HMRC website as below. Responses close on 4th and 16th August 2026.
- Tax Update 2026: simplification, modernisation and fairness summary
- Timely Payments in Income Tax Self-Assessment
How Heelan Assoc can help
In our experience, the best defence against government imposed changes is to have a secure business and a firm grip on your numbers. If you don’t have an accountant, or not sure yours is quite up to the job, just get in touch. We can talk through how we can help you maximise tax benefits and minimise tax bills for your business.
About the author
Dan Heelan is the Business Services Director of Heelan Associates, an accounting firm that helps small business owners across the UK start, survive, and grow.
With a background as a small business owner himself, he discovered his passion for accounting and tax early in his journey and now focuses on empowering fellow entrepreneurs with the knowledge and tools to navigate the financial side of running a business.
You can see and hear Dan in action in his regular: