The UK government plans to alter the method by which employees pay tax on additional self-employment income. Announced in the Budget by Chancellor Rachel Reeves, the new measure will require employees with secondary sources of income to pay tax on these earnings through their Pay As You Earn (PAYE) tax code from April 2029.
The change is designed to improve tax collection efficiency, but it has raised concerns among accountants and workers who earn irregular income, with some suggesting these changes could create financial challenges.
Introduction of Advance PAYE Taxation
From April 2029, employees earning additional income through self-employment or other 'side hustles' will be required to pay tax on these earnings via their PAYE tax code.
This represents a shift from the current practice, where self-employed tax liabilities are typically settled through a separate self-assessment process at the end of the tax year. The government’s new approach aims to streamline tax collection by moving payments closer to the time income is earned.
According to government documents, this move is intended to prevent debt accumulation and ensure more timely tax collection.
Details of Proposed PAYE System Changes
Under current rules, employees pay income tax through PAYE on their employment earnings, while self-employed income is reported and taxed through self-assessment returns. Workers who earn income from both sources may presently opt to pay self-assessment liabilities via their PAYE tax code, but only if the amount owed is under £3,000.
The government’s proposal will expand this arrangement, bringing more employees with additional earnings into the PAYE system for their self-employment tax.
According to Treasury estimates, the measure could generate an additional £925 million in public funds by improving the timing and accuracy of tax payments.
Impact on Those with Variable Incomes
The proposed changes have prompted concerns among those whose additional income varies throughout the year. Advance tax deductions will be based on the previous year’s liabilities, potentially leading to overpayments for workers with fluctuating earnings.
Many self-employed workers do not have an accurate understanding of their annual income until the end of the financial year, increasing the risk of excessive tax payments. Accountants have pointed out that workers may face challenges managing their cash flow if tax is collected in advance of earnings.
Workers earning most of their additional income in a specific season or period may be required to pay tax before having received the corresponding income.
Response from Tax Professionals
Some tax professionals have criticised the change as unfair to workers with irregular side earnings. Former tax director Mike Warburton commented that taxing future, yet-to-be-earned income could impact those whose earnings are not consistent throughout the year.
Other accountants, such as Chris Etherington of RSM, have advised workers to closely monitor their PAYE coding notices to avoid potential overpayments.
'The shift in timing may result in some workers having to reclaim overpaid taxes, which could pose administrative challenges,' Etherington said.
HMRC’s Position and Safeguards
HM Revenue and Customs (HMRC) has responded by stating that taxpayers will be able to update their in-year estimates if their predicted tax liabilities are significantly lower than in the previous year. This should allow workers to adjust their PAYE codes to reflect actual earnings more accurately.
Additionally, a safeguard remains in place to ensure that total PAYE deductions do not exceed 50 per cent of an employee’s gross PAYE income in any given pay period, providing a degree of protection for those affected.
Final Summary
The forthcoming reforms to advance taxation of self-employed side income via PAYE reflect the government’s effort to modernise tax collection and address revenue gaps.
While the policy aims to improve the timeliness of tax payments and reduce debt, it has triggered concerns from both professionals and employees about the potential impact on cash flow and the administrative burden of claiming refunds. With the new measure set for introduction in April 2029, many will be watching carefully to see how HMRC implements the safeguards and adapts existing processes.
Individuals seeking more insight into the financial and administrative effects of tax changes may benefit from resources such as the Pie app, which helps track income and anticipate future obligations.
