Self-employed face cash flow crunch as tax payments change
From April 2029, most sole traders will switch from biannual lump-sum tax payments to regular instalments, a move experts warn could create an overlapping tax burden and severe short-term liquidity problems.
The government will scrap the traditional January and July Payments on Account, replacing them with smaller, regular instalments from April 2029. Chancellor John Healey confirmed the change to income tax self-assessment (ITSA) payments in his maiden Autumn Budget. This shift will affect roughly one quarter of self-employed Brits who currently pay an estimated portion of their tax in advance every six months, based on the previous year's earnings. From 2029, this group will instead make regular in-year payments as their income is earned. Nobody's total tax bill is going up, but the payments will be collected sooner.
The cash flow crunch for the self-employed
Removing the six-month gap between payments will eliminate a vital financial cushion, potentially leaving founders short of cash during quiet months. Josh Toovey, Head of Policy & Research at IPSE, explains that the change means the twice-yearly tax bill disappears. IPSE warns that the loss of this gap removes a cash flow cushion many self-employed people rely on. The organisation points out that a lot of business owners put money aside as they go, and it is what gets them through a quiet month. Take that away and there is not much left, when IPSE's a third of self-employed people have less than three months of essential living costs saved. This financial vulnerability is showed by separate research which found that over a third of founders earn close to minimum wage.
Industry warnings of a 'brutal' transition
Advisers and business bodies warn the shift will create an overlapping tax burden and severe short-term liquidity problems for those with fluctuating incomes. The switchover could create a double hit, with old bills and new instalments overlapping. The Office for Budget Responsibility (OBR) forecasts this overlap will take £17bn out of self-employed taxpayers' cash balances in 2029-30. Advisers across the City have clashed over the decision, with some arguing the change will negatively impact those with fluctuating incomes and instead give HMRC a big cashflow advantage at the cost of taxpayers. David Portman, tax partner at Lubbock Fine, said bringing forward Self Assessment payments might seem harmless because the amount of tax people pay stays the same, but it could leave many short of cash. Lawyers and accountants are likely to be among the hardest hit because the amount of tax they pay each year can be significant, as well as those with significant savings income. Other advisers noted it will create a significant cashflow challenge for tradesmen as well as white collar professionals, including plumbers, electricians and farmers, alongside investors and landlords, and could cause some businesses to close their doors. Andy Oury, tax partner at Oury Clark, said the transition will be brutal. It will mean roughly eighteen months of tax squeezed into twelve. This could be a solvency event for some. Advisers urged the government to consider delaying the proposal or implement a phased introduction, to allow them to gradually bring their payments forward and stop workers running out of capital in 2029.
Potential benefits and the road ahead
While smaller payments may aid budgeting, the transition period poses risks, and the government must address concerns from the professional community. Tom Evennett, tax partner at PwC, added the changes may make budgeting easier for some taxpayers, by bringing payment closer to when income is actually earned. The Government says the change will modernise the 30-year-old system. HMRC points to payment punctuality, with around one in five self-assessment bills currently being paid late. The Office for Budget Responsibility (OBR) estimates the measure will generate £1.6bn on average annually from the 2029/30 tax year, driven partly by reductions in debt losses and by bringing forward the timing of tax recovery. Potential options for the new system include monthly or quarterly instalments, followed by a final adjustment once the return is filed. Those who also earn through PAYE are expected to pay through PAYE from 6 April 2029. Adam Jefferies, Director in the Private Client Tax team at PKF Littlejohn, noted that with key details still unclear, there are concerns over increased red tape and taxpayers being hit with bills based on out-of-date information. The change arrives as many self-employed people are feeling the pinch from costs like employer NI, VAT and energy bills. For now, nothing changes until April 2029, so the 31 January and 31 July deadlines still stand. The announcement signals a continued focus on strengthening HMRC's ability to recover unpaid tax, particularly from individuals who have the means to settle their liabilities but repeatedly fail to engage, said Andy Wood, barrister at Tax Barrister UK. While the system is designed to modernise tax collection, for many self-employed entrepreneurs the immediate impact will be a squeeze on working capital.
