Labour are consulting on freelancers payment on account becoming monthly

You might have seen yesterday's headline that Labour are plotting for freelancers to be paying their tax monthly, before they've even taken their income.

Let's dig into the details a little bit.

Firstly, this is a consultation - where you, as a freelancer, have the opportunity to share your views on the proposals. It's not a new law, but a recommendation they're wanting feedback on. We wrote about this in June, as HMRC published over 40 new changes, many of which they wanted input on.

It's called the "Timely Payments in income tax Self Assessment" consultation, and there are a few proposals they're looking for input on: namely, taking income tax via PAYE for freelancers, and increasing the frequency of Payment on Account from twice a year to quarterly, or monthly.

Now, there might be some benefits to this approach - smoothing payments over the year could make it feel a little easier than two big hits. What feels less painful, a smaller monthly amount or a large half-yearly amount? This is the government's stated rationale behind the proposals.

However, the arguments against this are plentiful...

Firstly, as this is payment on account and freelance income can be hugely variable, it could mean that you're being taxed more for a month than you actually made, causing shortfalls or an inability to pay. If this means having to regularly change the amount you're paying, that's not only a huge administrative burden, but also creates additional stress and concern, especially if you don't have the cash to pay the bill.

Secondly, as we know, freelancers rarely get paid on time, often waiting more than 30 days for late invoices to clear. Whilst the proposed system is based upon figures from the previous year, even if its based upon a monthly estimate, money is rarely paid to neatly coincide with the end of a month, nor can we control when our income lands. Having a monthly date to hit every four weeks means cashflow becomes increasingly challenging.

Thirdly, freelance income is rarely monthly. The idea that we're on some sort of salary where we can simply put aside a monthly amount is so far from the reality of how most freelancers work. Many are on longer term projects, where the funds only get paid at the end of a piece of work - rather than monthly. For decades, the mental model of building up funds, and paying a known amount, where you have time to plan your finances, has enabled freelancers to navigate the ups and downs. Making a payment monthly creates an incredible amount of additional stress.

With the combination of Making Tax Digital meaning quarterly reporting on income and expenses, payment on account consultations looking to consider monthly payments, close company transactions looking for insight into what payments are, and new rules around mandatory e-invoicing for certain businesses around the corner - it's clear that HMRC want to have a clearer picture of everyone's tax affairs in as close to real-time as possible.

But freelancers are not employees. One of the defining characteristics of self-employment is that we take on financial risk, by not being paid regularly, by effectively offering our clients an interest free credit-line, and no guarantee of income - and in return, we are offered some small level of control over our own spending, and modicum of tax relief by offsetting some of our costs.

All of our advice is always to think about your income in terms of the year, not each month. Being able to have a busier January allows you to handle a quieter February. Having cash in the bank for a period of time also allows us to consider how we invest that back into our work over the year.

In many ways, a monthly tax payment removes the smoothing, and reduces our ability to plan longer term.

Whilst HMRC are clear that a significant proportion of the "Tax Gap" is from small businesses, they also state that these issues come from errors, rather than some sort of intentional evasion. What is needed is simpler rules, simpler tools, better education and better support - not an overly burdensome or increasingly complicated tax landscape.

It is essential that freelancers share their views in the consultation on changing the frequency of their payment on account payments, so that we can share the significant impact this will create on the smallest and least supported of UK businesses.

» You can read and participate in the consultation here: Timely Payments in income tax Self Assessment