In a follow up to their previous call for evidence, on 23 June 2026, HMRC published a consultation on reforms requiring those with PAYE income to pay instalments of Income Tax Self Assessment (ITSA) liabilities each payday from April 2029. For those without PAYE income (including individuals, partners and those in receipt of carried interest), HMRC propose to replace the current payment on account regime with monthly or quarterly in-year payments.
Why the change?
Amongst other statistics, HMRC highlight the amount ITSA taxpayers contribute (£48 billion in 2024/25), the number of tax payments paid late (1 in 5) and the delay between the taxable activity and payment of tax (which can be up to 22 months). HMRC reference other OECD countries where tax is paid “around 3 months after the taxable activity”.
Why is it important?
For many taxpayers, this would be the single biggest change to tax payments since Self Assessment took effect 30 years ago.
What is changing - ITSA taxpayers with PAYE income
It was announced in Budget 2025 that from April 2029 ITSA taxpayers with a source of PAYE income, such as a salary or private pension, will be required to make payments on account toward their estimated ITSA liability (based on the most recently submitted tax return) through PAYE each pay period.
What is changing - ITSA taxpayers without PAYE income
Also, from April 2029, it is proposed that the current Payment on Account system will be reformed to make payments more frequent, which HMRC anticipate will help taxpayers to better manage their payments and reduce the overall level of tax debt.
The current proposals suggest moving from the system of bi-annual payments on account – which are based on the prior tax year and paid in January and July either side of the tax year end – to one where monthly or quarterly payments are made in the tax year towards that year’s liabilities but will be based on two tax years prior. For example, payments for the 2029/30 year will be based on the liability for 2027/28, for which the tax return will be due for submission by 31 January 2029. A balancing payment or repayment would then be calculated based on the 2029/30 tax return, due on 31 January 2031.
This approach may benefit taxpayers with a relatively stable income, but could have a detrimental impact on those whose income fluctuates significantly year on year. This would include, for example, private equity fund managers for whom carried interest returns can comprise a significant proportion of their total income in a given year.
Challenges for employers and employees
HMRC recognise (and seek views on) some of the main operational challenges. The current 50 percent deduction cap may need to be revisited for some taxpayers. Fluctuating PAYE income and ITSA liabilities could result in more regular changes to PAYE codes and introduce greater complexity for the employee to understand in their take home pay. Large employers may see increased scrutiny and questions from employees who may also be unhappy if errors result in unexpected balancing payments. The consultation does not comment on any potential changes to interest and penalty regimes.
Partnerships and other businesses
Partnerships often manage the tax payments of partners, on their behalf, through the use of tax reserves when distributing profits. Many businesses have fluctuating profits, and lock up can mean a significant delay between the earning of profits and cash receipts. Businesses may need to revisit borrowing, credit facilities and distribution policies to manage the monthly payments.
This will become even more challenging in cases where partners are being allocated a share of non-UK source group profits, on which UK tax is payable, which could be amplified by the timing of overseas tax payments as well as any annual fluctuation in these non-UK profit levels.
The challenge is particularly acute in the transitional year when, alongside the normal January and July payments, monthly payments will also need to be made. Any additional sources of income may add further complexity.
It is noteworthy that the proposed April 2029 start date follows the end of the five-year transition period for the basis period reforms introduced in the tax year ended April 2024. The last transitional profits will fall into the year ending 5 April 2028, on which the tax will be payable by 31 January 2029.
Private equity investment executives
Carried interest is the performance-related share of profits that private equity executives receive when investments are successful and investors achieve their target returns.
Since carried interest is typically dependent on the realisation of investment assets, hurdle conditions and overall fund performance, receipts can be difficult to predict and may vary significantly from year to year. Tax liabilities arising in one year may bear little resemblance to those arising in subsequent years. As a result, using historic tax liabilities as the basis for determining future in-year payments could result in significant overpayments or underpayments. Calculating appropriate monthly payments and managing the associated cashflows is therefore likely to be particularly challenging for those receiving carried interest.
The proposals also come shortly after the reform of the UK taxation of carried interest from April 2026. The interaction between the new carried interest regime and a more frequent payment framework could create additional complexity for taxpayers and advisers as the industry continues to adapt to these changes.
Similar issues can arise in relation to co-investment returns and management equity arrangements where returns are linked to investment realisations and can therefore be difficult to forecast.
High-net worth individuals (HNWIs)
HNWIs may derive their income from a number of different (non-PAYE) sources, which may include trades, property rents, interest or dividends, based either inside or outside the UK.
All such individuals and their family offices, will need to consider cash requirements and forward projections on a more regular basis, to ensure the payments remain at an appropriate level. With HMRC late payment interest rates pegged to the Bank of England Rate + 2.5 percent, there could be a significant cost to missing payments, or excessive reductions.
Associated matters and next steps
HMRC raise a number of questions on associated support for taxpayers, alternative suggestions, amendments to the current framework to facilitate the changes and the method of payment. The consultation closes on 4 August 2026.
If you would like to know how the proposed changes may affect you or your business, please direct any questions to your usual KPMG in the UK contact who will be pleased to assist.
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