The End of Payments on Account? HMRC's Plan for Pay-As-You-Go Tax

For decades, self-employed individuals and small business owners in the UK have lived by a very specific financial rhythm. It usually involves a frantic scramble in January and a slightly less frantic, but equally painful, payment in July. This is the "Payments on Account" system: a way of paying your tax in two massive lump sums based on what you earned the previous year.

But that rhythm is about to change. HMRC has recently launched a consultation titled "Timely Payments in Income Tax Self Assessment," and it signals the biggest shift in tax collection since the introduction of Self Assessment itself. The proposal? A move toward a "Pay-As-You-Go" (PAYG) tax model that could effectively end the era of the January and July tax cliffs.

In this article, we’ll explore what these changes look like, why HMRC is making them, and what they mean for your business’s cash flow.

The Current System: A Brief Reminder

Under the current rules, if your self-assessment tax bill is more than £1,000, you usually have to make "payments on account." These are two payments each year that go toward your next tax bill. Each payment is half of your previous year’s tax bill, due on January 31st and July 31st.

While this system is designed to help taxpayers stay on top of their bills, it often creates significant cash flow hurdles. A business that had a bumper year in 2023 might find itself struggling to pay a massive tax bill in January 2025, even if their current earnings have slowed down.

What is HMRC Planning for April 2029?

HMRC is looking to modernise the tax system to make it more "timely." The goal is to collect tax closer to the point where the income is actually earned. According to the consultation, which was highlighted by Baranov Associates and other industry experts, the government plans to introduce a mandatory Pay-As-You-Go style regime starting in April 2029.

The proposal splits taxpayers into two main groups, with different rules for each:

1. The PAYE Route (For those with employment or pension income)

If you are an SME owner who also draws a salary or has a pension, HMRC wants to use your PAYE (Pay As You Earn) code to collect your Self Assessment tax. Instead of paying those big lump sums in January and July, HMRC would adjust your tax code so that a portion of your estimated tax bill is deducted from your monthly salary throughout the year.

This calculation would likely be based on your tax return from two years prior. For example, your payments for the 2030/31 tax year might be based on what you earned in 2028/29.

2. The Direct Route (For pure self-employment or rental income)

For the roughly 9.5 million people who don’t have enough PAYE income to cover their tax bills: such as full-time sole traders or landlords: HMRC is exploring more frequent direct payments. Instead of two large payments, you might be required to pay monthly or quarterly.

This would align tax payments more closely with real-time earnings, similar to how VAT is currently handled for many businesses.

Why is HMRC Changing the Rules?

You might be wondering why HMRC wants to rip up a system that has been in place for years. There are three primary reasons:

1. Closing the Tax Gap: HMRC believes that by collecting tax more frequently, there is less chance for taxpayers to fall into debt or "lose" the money they should have set aside for tax.

2. Modernisation: With the rollout of Making Tax Digital (MTD), HMRC is moving toward a fully digital, real-time tax system. Frequent payments are the logical next step for a digital-first tax office. Businesses still relying on spreadsheets should also understand MTD 2026: What Happens If You Don't Have Bridging Software by the Deadline.

3. Budgeting Support: HMRC argues that many small businesses struggle to save for their tax bills. By making payments smaller and more frequent, they believe it will be easier for business owners to manage their finances.

What This Means for SME Cash Flow

The shift to a Pay-As-You-Go model is a double-edged sword for SMEs. On one hand, it removes the "Tax Hangover" that many businesses face in January. Knowing that your tax is being paid "bit by bit" can offer peace of mind.

However, the transition period could be tricky. When the new system begins in April 2029, taxpayers might find themselves paying off their "old" tax debt from the previous year while simultaneously starting their "new" in-year payments. This "double-dip" year could create a significant cash flow squeeze if not managed carefully with the help of a self-assessment accountant. It is also worth keeping an eye on how missed deadlines can lead to extra costs under HMRC’s rules, as explained in The £200 Penalty Trap: Understanding HMRC's New Points-Based System.

The Admin Burden

Another concern for small business owners is the administrative effort. Frequent payments require frequent record-keeping. To ensure your Pay-As-You-Go payments are accurate, you will need to keep your books up-to-date throughout the year, not just in December and January.

This is where digital tools and professional accounting services become essential. If you are a limited company accountant or a sole trader, you will need to ensure your software is fully compatible with HMRC’s real-time requirements.

How to Prepare Now

While 2029 might feel like a long way off, the foundations for these changes are being laid right now through the "Timely Payments" consultation. Here is how you can start preparing:

• Embrace Digital Bookkeeping: If you aren’t already using cloud accounting software, now is the time to start. Real-time visibility of your income is the only way to manage a PAYG tax system.

• Review Your Cash Flow: Start looking at your business’s cash flow cycles. How would your business handle a monthly tax deduction instead of a bi-annual one?

• Speak to a Professional: A qualified accountant can help you navigate the transition and ensure you aren’t caught out by the "double-payment" year. You can find an accountant who specialises in SME tax through our platform.

Final Thoughts

The end of "Payments on Account" would mark a new era for UK taxpayers. While the prospect of more frequent payments might seem daunting, it also offers an opportunity for businesses to move away from the stress of the January tax deadline.

At Accountant Search, we are committed to helping SMEs stay ahead of these changes. Whether you need help with your current tax returns or want to find a partner to guide you through the 2029 transition, we are here to match you with the right expertise. If you are also comparing providers, our guide to Accounting Services UK: The Complete Guide to Finding the Right Accountant for Your Business is a useful next step.

The consultation for "Timely Payments" is open until August 4, 2026. If you have strong views on how these changes will affect your business, now is the time to make your voice heard.

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By Richard, Content Specialist at Accountant Search.