Millions of UK households with side incomes could soon be forced to pay tax on money they have not yet earned, under controversial new proposals from Chancellor Rachel Reeves.
The PAYE Expansion for Side Hustles
Currently, self-employed workers and those with secondary income must complete a self-assessment tax return and settle their bill by January 31 each year. Some with liabilities under £3,000 already opt to have this tax collected via their PAYE (Pay As You Earn) tax code.
However, under new Labour Budget plans set for introduction in April 2029, this system would be significantly expanded. Many more employees with side hustles would see their self-assessment tax liabilities collected through the PAYE system, with regular deductions taken directly from their salary or pension.
A "Fundamentally Unfair" System?
Tax experts are raising the alarm that this change could lead to workers being taxed on income they have not yet received. The in-year PAYE deductions would be calculated based on the individual's side hustle earnings from the previous tax year.
Mike Warburton, a former tax director at accountants Grant Thornton, highlighted the potential for injustice. "You might make all your money over Christmas but get asked to pay tax throughout the whole year," he told the Telegraph. "So it’s a tax on income you haven’t earned yet, which is fundamentally unfair."
He also expressed serious doubts about HMRC's ability to process timely refunds for those who overpay, stating: "I have no confidence in HMRC being able to make refunds in good time."
Risks of Overpayment and Administrative Burden
The Treasury estimates the measure will raise £925 million through "debt prevention" and more "timely" tax collection. However, it places a new burden on taxpayers to monitor their payments closely.
Chris Etherington from accountancy firm RSM warned that individuals with fluctuating side income will need to scrutinise their PAYE coding notices carefully. Failure to do so could result in significant overpayments to HMRC, which may be difficult to reclaim promptly.
HMRC has stated that taxpayers can make their in-year payments more accurate if they know their actual tax owed will be substantially lower than the forecast based on the prior year. This, however, requires proactive engagement from the taxpayer.
The concerns over HMRC refund delays are not theoretical. The article notes one retiree who filed a self-assessment in mid-December and was still waiting for a refund three months later, contrary to the usual one-week turnaround he experienced.
This proposed shift represents a major change in how side income is taxed in the UK, prioritising Treasury cash flow but potentially creating complexity and unfairness for the growing number of Britons with gig economy work or secondary businesses.
