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What the Budget means for small businesses
Small business owners should prepare themselves for one of the biggest shake-ups to the UK's tax system in decades. Here's what it means
Millions of small business owners and self-employed workers now face a significant new headache. Plans to change the way they pay income tax will raise almost as much as tax increases for banks and savers, the Budget small print reveals, and unlike the tax hike on banks, this reform is intended to be permanent.
Very quietly, the chancellor has announced one of the biggest shake-ups to the UK's tax system in decades. It will affect around 12 million people who currently pay income tax through the self-assessment system, including self-employed workers and small businesses whose owners operate as sole traders rather than as limited companies. Landlords and others with more complex tax affairs will also be caught.
Currently, these taxpayers must file a tax return by the end of January in the year following the end of the previous financial year – so by 31 January 2027 for the 2025-2026 tax year ending on 5 April 2026, for example. By this stage, many taxpayers will have made payments for the 2025-2026 tax year, with half their estimated liability due by 31 January 2026 and the other half by 31 July 2026; any unpaid tax identified in their tax returns must then be paid by the 31 January 2027 deadline, alongside a first payment on account for 2026-2027.
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However, from the 2029-2030 tax year, the government intends to switch to a system where taxpayers pay what they owe through regular payments during the tax year itself – probably on a quarterly basis, although ministers could even opt for a monthly system. The Treasury says the move will raise £1.3 billion in the 2029-2030 tax year, rising to £1.8 billion two years' later. Partly, that windfall for the Exchequer reflects the fact that an in-year system will make some tax-avoidance strategies more difficult; the Treasury also points out that currently some small businesses go bust before paying the tax they owe, so the money is never collected.
Yet more red tape for small businesses
This switch is going to be very challenging for many people. Around two million of those affected also pay tax through the PAYE system because they're in employment as well as having income to declare through self-assessment. HM Revenue & Customs is confident it can collect the tax owed by most of these people in this way. For the other ten million self-assessment taxpayers, however, the onus will be on them proactively to settle their tax bills on time.
Practically speaking, that will require taxpayers to maintain accurate and up-to-date records of their earnings and to make regular submissions to HMRC. Earlier this year, the tax authority extended the Making Tax Digital system to the self-assessment income-tax regime, requiring many people to make quarterly electronic tax returns. But take-up has so far been slow and currently it's only information that's required rather than any payment.
Self-employed workers and small-business owners point out that their income is often unpredictable. Their earnings may vary considerably over the course of a single tax year; customers may be slow to pay their bills. This could cause significant problems when income tax is due much sooner than in the past, whether it's collected through PAYE or through payments made on a standalone basis.
A painful transition
There will also be a painful transition to manage. In the 2029-2030 tax year, many taxpayers will have to pay both tax liabilities related to their actual earnings and a bill for any unpaid tax still due from 2028-2029. For some, this double whammy could cause significant problems.
Small-business groups and accountants are already urging the Treasury to delay the reforms, particularly with the final details still to be agreed. However, the government is determined to move to the new system – so any delay will probably only be pain deferred.
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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
