Research and analysis

Newly registered Self-Assessment customers’ views on registration timing and timely payment

Published 29 June 2023

Prepared by IFF Research for HMRC

Rob Warren, David Power, Malina Cojocaru, Monica Kumari

Research report number: 707

November 2022

The views in this report are the author’s own and do not necessarily reflect those of HM Revenue and Customs.

Executive summary

Introduction

This report outlines the findings from qualitative research commissioned by HM Revenue and Customs (HMRC) into the views and experiences of individuals who have recently become required to register for Income Tax Self-Assessment (ITSA). The research aimed to:

• look into the participants’ knowledge and experience of tax and financial matters

• explore their experiences of ITSA registration, or, if they had yet to register, examine reasons behind that

• analyse their perceptions around current and potential future support options offered by HMRC

• seek views on more timely and frequent payment of tax based on in-year tax liabilities

The research comprised of 40 qualitative interviews with individuals who were required to register for Income Tax Self-Assessment (ITSA). The interviews were carried out with several groups. Participants had recently:

• become self-employed or a landlord

• started earning foreign income or income from dividends

Participants were further categorised based on whether they had registered for ITSA or had not yet registered for ITSA at the time of the interview. The interviews took place between 22nd March and 3rd May 2022.

Key Findings

The key findings from the research, organised under the headings of the three main chapters of the report, are as follows.

Prior knowledge and experience of tax and financial matters

Most participants across the groups were aware that they would need to register for ITSA when they became self-employed, a landlord, started to receive foreign income or income from dividends. Some did not know that this was called Income Tax Self-Assessment (ITSA) but they were aware of the need to pay tax on their income and that they would need to inform HMRC that they were drawing an income from one of these sources. Whilst many participants were uncertain about the specifics of how to register, they assumed they would be able to work it out once they had researched the process.

There was low awareness of the October notification deadline. Participants who were aware of the October notification deadline said that they had found out about this from messages on the HMRC pages on GOV.UK, on their accounting app or directly from their accountant.

Participants’ understanding of their tax obligations was generally mixed. Very few were aware of the exact point at which they would be liable to pay tax on their income and others seemed to rely on assumptions or on their own view about what would be reasonable. While most participants were either aware of or assumed that tax liability is linked to a specific financial milestone, some participants across the groups took a vague and personalised view of when they would be required to pay tax. Across the groups, there were participants who linked tax obligations to the idea of being ‘established’ or the point at which they began to think of themselves as being self-employed, a landlord or someone receiving foreign income or income from dividends.

Overall, landlord participants appeared less certain of their obligations than the other groups. Those who were least sure of this were those who described themselves as ‘accidental landlords’: individuals who had inherited property and not intentionally planned to become landlords. Therefore, specialised third-party support was important to some of those in the landlord group who often relied on brokers, mortgage providers and letting agents to guide them through their obligations.

Awareness of different tax allowances was low and the terminology associated with these was not well understood. Despite low awareness overall, participants showed the greatest amount of awareness and understanding of the income tax personal allowance. Of those who were aware, most knew that it allowed someone a tax-free income of around £12,000 to £13,000. There was very low awareness and understanding of any of the other allowances which were asked about during the interviews (e.g. Capital allowance, Trading allowance and Property allowance).

There was low awareness of the support options available from HMRC, including the Budget Payment Plan and Time to Pay. Some participants indicated vague awareness of these support options and said they had seen messages about them while completing their ITSA form. Few participants had used a support option.

Participants across the groups felt that HMRC should increase awareness of the support options they offer, including through direct communication via email or text, and social media advertising. They said that they would find this reassuring to know and as a result could help those who may be struggling to meet their tax obligations.

Experience of and views on ITSA Registration

The majority of those who had already registered for ITSA had done so themselves and found it straightforward.

Participants who used an accountant tended to register more promptly. Those who hired accountants prior to registering said they were advised to register early so that the accountant could “get on with their job”.

The most commonly given reasons for not registering centred around time and perceived eligibility. The most common reason given for not registering was simply that they had not got round to it or had been focussing on other things. This was the case for several self-employed participants and landlords. Registering for ITSA was seen as lower down their priority list than other more urgent tasks related to setting up their business or doing work on their rental property. Several participants also said that they thought they had to register after a year, so did not think they needed to yet. Another reason participants had not yet registered was that they believed they had not yet earned enough income to begin paying tax.

Some participants stated that they were purposely putting off registering due to the perceived administration burden. These participants perceived registering as likely to be a time-consuming process and that it would take a while to gather all the necessary paperwork beforehand. Registering was seen as a hassle and a potentially unnecessary administrative burden, with a few participants saying there was no point filling in all the forms if it was likely that they would not have to pay anything at the end. A minority also expressed worry about potentially “doing it wrong” and were planning to seek advice from an accountant as a consequence.

The timing of registration depended on participants’ knowledge and awareness of the notification deadline. Generally, those who registered early had less knowledge and awareness of the 5 October notification deadline and said they had done so to avoid any issues with HMRC. The October notification deadline itself was generally not thought to be an issue, although some participants did suggest that it could be pushed back to December so it would be in line with the calendar year, while some thought it would be simpler to allow taxpayers to register and then immediately complete a self-assessment return.

One frustration with the timing of the registration was how long it took to receive the Unique Taxpayer Reference (UTR) number. Some suggested a secure email may help reduce the time lag produced by this, rather than a letter in the post.

Nearly all the participants stated they were confident in their ability to budget for tax, which they tended to start to do even before registering for ITSA. This was the case despite most having been unaware of the support options HMRC offered.

In general, awareness and usage of the ITSA tools and guidance was low. Most participants did not use the tools or guidance available via HMRC when completing their ITSA registration. Several participants said they were not aware there were any tools available. Participants were more likely to use other sources of guidance such as YouTube, online webinars or searching elsewhere for advice. Accounting software and video tutorials were suggested as useful forms of support, and some indicated that if HMRC produced these forms of guidance they would be more likely to use them.

Reactions toward more timely and frequent payment of tax

Initial reactions to the idea of paying tax based on in-year liability were generally positive, especially among those already registered, whereas it received more mixed opinions from those not yet registered due to uncertainty about how it would work. However, there were uncertainties about how it could work in practice and whether it would work for them personally. There was some confusion about what paying tax on in-year liability meant exactly and some participants tried to make sense of the idea by comparing it to paying tax via PAYE or quarterly VAT payments, which they considered may be appropriate “for some people”.

The potential benefits of paying based on current in-year liability identified were:

• easier to give an accurate declaration of their finances using more recent data, similar to PAYE

• avoids ‘nasty surprises’ as liability is closer to when profit was made

• may help more with financial security and resilience than being taxed in arrears. For instance, during a ‘bad year’ tax payments could be paid based on a previous ‘good year’, and some self-employed participants mentioned paying based on in-year liability would have helped them during COVID-19 when they weren’t earning as much

The potential drawbacks and complications of paying based on current in-year liability were:

• could be difficult to get used to a new way of working

• calculating profit retrospectively once a year is more accurate because it ‘evens itself out’ over the course of the year – particularly for businesses with fluctuating cashflow such as those in seasonal industries

• some thought it would be complicated and questioned whether they would be required to forecast future income

Participants were generally positive about the idea of paying tax more frequently. Most assumed that more frequent payments would go hand in hand with basing payments on current in-year liability and the two ideas were discussed somewhat interchangeably by most. However, splitting their tax payment and paying multiple times per year was also considered a good idea by some who were against calculating tax on in-year liability but would rather payments be made towards the previous year’s liability. There were a number of possible benefits and drawbacks raised about the idea of more frequent payments, many of which overlapped with those identified for basing payment on current in-year liability. The most frequently mentioned benefit was not paying a big tax bill all at once.

Participants across all groups thought it would be a good idea for HMRC to offer the option of setting up a direct debit, but most were fairly negative about the idea of setting one up to pay their own tax. Negative reactions stemmed from either a general dislike of using direct debits or a reluctance to use one for tax specifically.

1. Introduction

1.1. This report outlines the findings from qualitative research commissioned by HM Revenue and Customs (HMRC) into the views and experiences of individuals who have recently become obliged to register for Income Tax Self-Assessment (ITSA). The research explored the participants’ experiences of ITSA registration, or if they had yet to register, explored reasons behind that; their perceptions towards current support options and potential future support options; and sought reactions and consideration of proposed ideas around more frequent and timely payment of tax.

1.2. Following discussion of the context for the research, the report sets out the methodological approach used. The findings from the research are organised into the following chapters: Chapter 3 - Prior knowledge and experience of tax and financial matters; Chapter 4 – Experience of and views of ITSA registration, including the views of those who are yet to register; and Chapter 5 – Reactions towards more timely and frequent payment of tax, in which the report explores the participants’ reactions to ideas proposed during the interviews. The final chapter sets out IFF Research’s recommendations, based on the findings from the research, to improve awareness and understanding of ITSA obligations, and to improve the chances of the successful introduction of the possible changes to policy explored in the research.

Background

1.3. Most people in the UK pay all their Income Tax ‘at source’, for example, through Pay As You Earn (PAYE) if they are employed and are not required to file a Self-Assessment (SA) tax return. However, individuals and businesses with other sources of income and those who meet the threshold of the High-Income Child Benefit Charge (HICBC) must self-report this income in a yearly tax return. Where tax has not been deducted automatically from wages, pensions and savings, Income Tax Self-Assessment (ITSA) is the system HMRC uses to collect Income Tax, Classes 2 and 4 National Insurance, and Capital Gains Tax.

1.4 It is the individual customers’ responsibility to notify HMRC that they have a tax liability. For some groups of newly self-employed customers there can be a notable lag between the tax year in which they start to generate income and the date at which they must notify HMRC that they have a tax liability. Depending on when an individual starts self-employment they may not be obligated to notify liability for up to 18 months and make their first tax payment for up to 22 months. Taxpayers who are already receiving a notice to file a tax return for other reasons, such as someone who pays High-Income Child Benefit Tax Charge, can add new self-employment or property income to the first appropriate tax return. Though notifying a tax liability is not the only reason for this type of customer to register a new self-employment, since registering will also set up their National Insurance record and ensure access to contributory benefits.

1.5 The timing of these current obligations and the potential delay in meeting tax liabilities can cause problems for new taxpayers. Research has found that customers who are new to self-assessment are less likely to be aware of their tax obligations and, consequently, less likely to meet these obligations.^{[footnote 1]}

1.6. The Government wants tax to be straightforward, easy to get right and hard to get wrong. In July 2020 the government set out its 10-year strategy to build a ‘trusted, modern tax administration system’. It is a vision for working closer to real time to deliver a flexible, responsive tax system.

1.7. As part of that vision the government committed to seek views on whether bringing forward the point at which the self-employed and landlords make themselves known to HMRC would help achieve this vision and HMRC released a Call for Evidence in November 2021 as a part of that commitment. Registering earlier can help taxpayers develop good tax habits from the start. This will improve their experience when interacting with the tax system

1.8. Timely Payment is another element of this strategy. Timely Payment is defined as bringing the calculation and payment of tax closer to the point where the income or profit arises, paying tax based on the customer’s current in-year position using (where possible) real time (or close to real-time) data. This will allow people and businesses to pay the right tax with ease in a way that more readily fits with how they live their lives and go about their business.

Research Objectives

1.9. The core objectives of this research were to:

• gauge and explore the views of newly registered ITSA customers, and those yet to register, on registration timing, more frequent payment of tax and support measures which could help them to develop good habits

• gather evidence on the challenges of current registration and payment related obligations, the possible benefits if the obligations are reformed, and the impact of those benefits. Additionally, HMRC wanted to understand whether there is an overall appetite for change

• use the findings from the research to shape and inform policy around registration timing, timely payment of tax and support measures offered. The findings will support ongoing stakeholder engagement, policy development and any future consultations in this area

2. Methodology

2.1. This chapter sets out the methodological approach taken for this research. It begins by providing a brief overview of the methodology and then sets out in more detail the different components of the approach including topic guide development, fieldwork, and analysis. The chapter concludes with a ‘how to read’ section which establishes the scope of the research and important considerations when interpreting the findings.

2.2. The research comprised 40 qualitative interviews with individuals who had recently become either: self-employed, a landlord, had started earning foreign income, or had started earning income from dividends; and were therefore obliged to register for Income Tax Self-Assessment (ITSA). Participants were further categorised based on whether they had registered for ITSA or had not yet registered for ITSA at the time of the interview. The interviews took place between 22nd March and 3rd May 2022 and were conducted by telephone or video call (depending on the participant’s preference). Each interview lasted approximately 60 minutes.

2.3. Participants were recruited to take part in the research via a ‘free-find’ approach conducted in partnership with Mojo Fieldwork. Participants were categorised on the basis through which they drew their income and by whether they were newly registered for ITSA or not at the time of the interview. The final sample composition is set out in Table 2.1 below.

Table 2.1 - Sample composition – Income and ITSA Registration

Main source of income	ITSA Registration	No. of interviews
New self-employed	Registered	16
	Not registered	6
New landlords	Registered	6
	Not registered	6
Foreign Income/UK Dividend	Registered	3
	Not registered	3
Total		40

Topic guide development

2.4. The topic guide was developed through a collaborative and iterative process between HMRC and IFF Research. It was designed and structured to meet the research objectives and included modular components that allowed it to be used flexibly with each of the participant groups. The final topic guide was designed for interviews up to 60 minutes in duration and included the following areas:

• introduction, including full data protection information

• ‘warm up’ questions including a description of how participants derive income that is subject to ITSA registration

• establishing a business or becoming a landlord etc., strategies for managing finances and paying tax

• for those who had registered for ITSA, how they viewed the process of registering

• for those who had yet registered for ITSA, their perceptions towards the registration process and reasons for not yet registering

• perceptions of current support options and possible shape of support in the future

• reactions to ideas around more timely and frequent payment of tax based on in-year tax liabilities

Fieldwork

2.5. As mentioned in paragraph 2.3, a ‘free-find’ approach was deployed to recruit participants. This means that participants were not recruited from a pre-existing sample source, but rather they were ‘found’ in the general population by recruiters working for Mojo Fieldwork. Contact details for participants who had been identified and fit the eligibility criteria by Mojo Fieldwork were passed on to IFF Research, who then arranged for an interview to take place and monitored progress towards fieldwork targets. Participants were offered a monetary incentive to take part, which they could either donate to a charity or receive themselves.

2.6. Participants were placed into the following categories based on where they drew their income from: self-employed, a landlord, had started earning foreign income, or had started earning income from dividends. For the purpose of categorisation, participants who drew an income from multiple sources were asked where they drew the most income and were placed in that category. Participants were further categorised based on whether or not they had registered for ITSA at the time of the interview. The number of interviews completed with participants in each of these categories and sub-categories is set out in Table 2.1.

2.7. In addition to the broad categorisations set out in paragraph 2.6 and Table 2.1, participants were also recruited based on the UK nation in which they were living in order to ensure robust representation of all UK countries within the sample. The national breakdown is included in Table 2.2 below.

Table 2.2 - Sample composition – UK country

UK nation	No. of interviews
England	16
Northern Ireland	7
Scotland	10
Wales	7

2.8. Once participants were recruited to take part in the research, interviews were carried out by trained IFF Research interviewers either by telephone or by video call depending on the participant’s preference. With participants’ permission, interviews were recorded.

Analysis

2.9. A rigorous analysis process followed the fieldwork, including:

• development and completion of an analysis framework to arrange responses into topics and allow ‘at-a-glance’ comparisons of different participant groups

• a period of study of the analysis framework by all members of the research team to identify and interpret the findings and themes emerging from the different sections of the interview. This study of the analysis framework was conducted with reference to the research objectives and with a view to establishing the points of similarity and contrast between the different subgroups

• an analysis meeting involving all members of the research team to discuss and interrogate the evidence for the main findings and themes from the research

How to read

2.10. Based upon the findings from the 40 qualitative interviews, the narrative presented within the remainder of the report follows a number of analysis conventions. In particular, no percentages are given in the report. This is because the research is qualitative in nature and is based on a small number of participants. While words like ‘many’, ‘some’ and ‘few’ are used to indicate the strength of the message, this is not an attempt at quantification and it is not appropriate to generalise the findings from this research to the wider population. However, it is possible to use the interviews to bring together the range of opinions and experiences expressed to build up a thematic understanding of how people view the matters discussed during the interviews.

2.11. Themes presented throughout the report are based upon the perceptions and opinions of participants, and therefore potentially subject to participant misunderstanding. Although every effort was made to ensure the questions asked in interviews were as easily and widely understood as possible, participant knowledge and recall of the details of their experience may in some cases be incomplete or based on misconceptions.

3. Prior knowledge and experience of tax and financial matters

3.1. This chapter explores participants’ awareness, understanding and experiences associated with their tax obligations. It outlines their experiences of paying tax, including when and how they do this. It then discusses their awareness of ITSA and their tax obligations related to this, including the relevant tax allowances. It also covers how confident participants’ felt about their budgeting skills and the methods they used to budget. Finally, it explores awareness and experiences of using support options available to self-assessment customers when paying their tax.

Current tax payments

3.2. Around half of the participants interviewed had some experience with paying tax through ITSA. Among this group, annual lump sum payments were the most commonly used approach. Participants who preferred to make a lump sum payment generally said the reason for this was that they wanted to clear any tax they owed so they did not have any debt and therefore did not need to think about it again. This approach was particularly popular among participants who said they budgeted carefully for their tax throughout the year, as this meant they had money available when they received their tax bill.

3.3. Participants in the registered foreign income and landlord groups generally reported that they preferred paying their tax in an annual lump sum payment. As well as wanting to avoid having an outstanding bill to think about, participants in these groups also believed that this payment method allowed them to have more control of their money as they could check the bill and, if they were happy that it was correct, pay it when they were ready.

“All at once. [I’m] good at budgeting, so find it easy to deal with everything in one go.” - Foreign income, Registered

3.4. Whilst most participants in the self-employed group also said that they preferred to pay their tax annually in one lump sum, there was more variation in responses within this group. Some participants reported that they preferred to make more regular payments, for instance twice a year, quarterly, or monthly. The main reason for preferring this payment frequency was a concern that they would not be able to budget effectively throughout the year in order to manage a lump sum annual payment.

“If everything is all together that may be hard for me to manage my finance.” - Self-employed, Registered

3.5. Participants who had not started to pay tax through the ITSA system generally said that once they were paying tax through the system, they would ideally like to do so as soon as they could, in one annual lump sum. Many of these participants only had experience of the PAYE system and so were not used to needing to budget or think about paying their tax. This group tended to want to pay their tax as quickly as possible as they were concerned about accumulating debt. However, some participants who had not yet registered did think that an instalment option may be useful for those who might struggle with budgeting or have a large bill to cover.

“I would rather do that [pay all at once]. I guess the instalment system is handy if you rack up a lot of tax.” - Self-employed, Not registered

Awareness of need to register for ITSA

3.6. Most participants across the groups were aware that they would need to register for ITSA when they became self-employed, a landlord, started to receive foreign income or income from dividends. Some did not know this was called Income Tax Self-Assessment (ITSA) but they were aware that they needed to pay tax on their income and that they needed to inform HMRC.

3.7. While there were no clear differences in levels of awareness of the need to register for ITSA between those who were represented by tax agents and those who were not, a minority of unrepresented participants stated that the first time they became aware of the need to register was when they were invited to take part in the research.

3.8. Generally, participants heard about the need to register for ITSA from someone they knew or by doing their own research online in preparation for becoming a landlord or self-employed. A few were unsure about where they became aware of the need to register and felt that this was just general knowledge.

“Just from talking to friends and Googling. You have to be aware of all these taxes, registration regulations and various other restrictions when you become a landlord. We had a checklist and that was on the checklist. We had an idea, we knew a bit about it beforehand.” - Landlord, Not registered

3.9. Participants relied on the following information sources to find out more about ITSA and the registration process:

• friends, family and other acquaintances

• GOV.UK

• accountant

• HMRC television adverts

• accountant television adverts

• Department for Work and Pensions (those claiming Universal Credit and discussing a move to self-employment)

• mortgage brokers or letting agents (those becoming landlords)

3.10. A small minority were not aware of ITSA or that they may be required to register to pay tax on their income. This was due to them thinking they had not made enough money to be liable for tax and therefore not considering the need to take action or seek out relevant information.

“I’m not too clued up about it, I guess I thought I wasn’t earning enough that I had to sign up.” - Landlord, Not registered

3.11. Most participants who were aware of the need to register for ITSA said they were not sure of exactly what this involved until they researched the process in preparation for their registration, either by searching for information on the HMRC pages on GOV.UK or by asking for advice from HMRC, someone they knew, or a third party.

3.12. Overall, there was low awareness of the October notification deadline. For many participants, this was not felt to be important as they had registered immediately, so they did not need to consider the deadline. Some of these participants were unaware that there was a deadline and were uncertain about why this would be in place. Participants who were aware of the October deadline said that they had found out about this from messages on the HMRC pages on GOV.UK, on their accounting app or directly from their accountant.

3.13. Participants did not have strong feelings about the notification deadline. Most were either unaware of it when they registered or were aware but said it did not affect the timing of their registration. However, some participants said learning about the notification deadline and realising they still had time left encouraged them to delay, simply because they could.

“I saw that date, and maybe it's made me push it to the back of my mind, knowing I have time, I can leave that for now. It was in bold, it really caught my eye.” - Landlord, Not registered

Understanding of tax obligations

3.14. Participants’ understanding of their tax obligations were generally mixed. Very few were aware of the exact point at which they would be liable to pay tax on their income and others seemed to rely on assumptions, or on their own view about what would be reasonable.

3.15. There were no clear differences in individual understanding of tax obligations between those who were represented by a tax agent and those who were unrepresented. The key difference between these groups was that represented participants who lacked confidence in their understanding of their tax obligations were able to pass this responsibility over, while the unrepresented did not currently have this option. However, a number of unrepresented participants recognised this as a problem and stated they were considering, or were in the process of, hiring an accountant.

3.16. Only a small number of participants referenced the £1,000 tax free allowances for property or trading^{[footnote 2]} when asked at what point they thought they would be liable for tax. All these views were from the self-employed group, including some who were registered and some who were not. However, even within this small group there was some confusion about whether, once the allowance has been reached, this meant registration was required or tax needed to start being paid on their income. Also, those who had another source of income were confused about how this allowance worked.

“If you earn over the £1k 'trading allowance'. If you earn over that, you have to declare it.” - Self-employed, Registered

“HMRC does say on the website that liability only starts after you have earned £1000… But I am less clear how that works if it is a second income.” - Self-employed, Registered

3.17. Most participants were not aware of the exact point at which they would be liable to pay tax, and many thought they would be liable when they first received income. For self-employed participants, this was when their first invoice was paid. For landlords, this was the first time someone paid rent and for the foreign income group, the first time income was paid into their bank account. These participants did not think that the value of the payment was important. Instead, they believed that receipt of any payment was an indicator they were trading and therefore they would be liable to pay tax.

“I think it begins when you get your first month of rental. It's the first bit of extra income that you're having.” - Landlord, Registered

“It begins the minute the first invoice is paid into your account.” - Self-employed, Registered

3.18. Others linked tax liability to making a profit. Most registered self-employed participants said they believed they would be liable to pay tax as soon as they began to make a profit, or when, by their own definition, began to make “enough income”. These participants said that in the early months of trading they either had significant outgoings which meant that they were not turning a profit, or they had invoiced for work but had not been paid, meaning that they had little to no money in their account. These participants also seemed to have little or no awareness of the £1,000 trading income allowance and instead seemed to assume they would be liable to pay tax on any profit they made.

“Pretty easy… the company is turning a profit. So obviously there's gonna be tax” - Self-employed, Registered

3.19. While most participants were either aware of or assumed that tax liability is linked to a specific financial milestone, some participants across the groups took a vague and personalised view of when they would be obligated to pay tax. Across the groups, there were participants who linked tax obligations to the idea of being ‘established’ or the point at which they began to think of themselves as being self-employed, a landlord or someone receiving foreign income or income from dividends.

3.20. Self-employed participants who took this more personal view towards tax liability generally seemed to have started their self-employment work as a small side project, for example during their spare time around another job. Others who took this view became self-employed after being made redundant from a previous job. Similarly, there were a small number of participants in the foreign income group who linked tax liability to a steady income stream. These participants believed they would only be liable to pay tax once they became established, associating this with receiving regular income. Some linked being established with being self-employed for a period of time, for example, a year or two.

“I was like this is going to be a big contract where I was going to get a continued amount of work from him.” - Self-employed, Registered

3.21. Among the landlords, there were also a small number who linked tax liability to being established. Although this perspective was less common within this group, a couple did seem to think that tax liability began when they started to think about themselves as a landlord, rather than when they first began to receive rent payments from tenants.

“Once you make profit and you have established yourself. You can't just call yourself a landlord, you need to have experience and know what you are doing.” - Landlord, Registered

3.22. For participants who did not associate tax liability with a specific financial milestone, their definitions were almost entirely personal, and they did not seem to question whether HMRC may have a more specific rule in place. The three driving factors for these participants’ views on tax liability were:

• intention – these participants did not appear to intend to become self-employed, a landlord or to be in receipt of foreign income or dividends. They stated this was something that happened to them rather than something they set out to do

• pace – those for whom their ITSA relevant income was a secondary income with values under the taxable amount for a while, before growing and reaching the registration and tax threshold. These participants did not have a clear period or stage at which they researched and sought to understand their tax obligations, which other participants mentioned as part of their initial ‘set-up’ stage

• income sources – participants who had one or more other sources of income described being confused about how this affected their tax obligations. For some there seemed to be an assumption that they were not liable to pay tax if they were paying tax on another income source, for example work where they were taxed through PAYE

3.23. Despite these issues, most participants said that they did not experience any significant difficulties in working out that they were liable to pay tax. Difficulties that were raised tended to be specific to the sub-groups. Those who were unsure tended to rely on their accountant if they had one, on the advice of friends or family, or on sector specific advice (i.e. landlords relying on letting agents to inform them of their obligations).

3.24. Self-employed participants who found it difficult to work out if they were liable to pay tax said this was often due to having another source of income. Those who had another main source of income at the point they became self-employed were sometimes unsure how this affected their tax obligations. This included participants who were aware of the £1,000 trading allowance but were unsure if it would apply to them as they were already paying tax on another income. Additionally, some participants assumed paying tax on another income source may mean they could keep more of their self-employment income before they started to pay tax.

3.25. Overall, landlord participants appeared less certain of their obligations than the other groups. Those who were least sure of this were those who described themselves as ‘accidental landlords’ who had inherited property and not intentionally planned to become landlords. Fewer participants in this group who inherited property sought out advice and information from third parties, for example, from mortgage brokers or buy-to-let mortgage providers. By contrast, specialised third-party support was important to others in the landlord group who said they often relied on brokers, mortgage providers and letting agents to guide them through their obligations.

3.26. Participants in the foreign income group often mentioned the complexities of ensuring that they were abiding by the rules in every country they received income from and their difficulties trying to navigate that. Some participants in this group also mentioned Great Britain’s exit from the European Union, highlighting it was difficult keep up to date with changes in legislation that would affect their tax obligations.

Understanding of tax allowances and terminology

3.27. Awareness of different tax allowances was low and the terminology associated with these was not well understood. Participants had the greatest amount of awareness and understanding of the income tax personal allowance, and most knew this allowed someone a tax-free income of around £12,000 to £13,000. Most participants in the landlord and foreign income groups had a good understanding of this allowance and recognised the term for it.

“A buffer built into your income which is a tax-free amount … first £12k I think is tax-free, you pay tax from earnings over that point.” - Foreign income, Registered

3.28. Awareness and understanding of tax allowances and terminology was lower in the self-employed group. Although some were familiar with the income tax personal allowance and recognised the term, many were not. A few said they recognised the term but were unsure of the meaning. Despite this, some self-employed participants were not aware of either the term itself or its meaning. A minority wondered if it was something that they needed to claim and might be missing out on, and another thought it may be for those who work from home.

“Working from home benefits?” - Self-employed, Registered

3.29. There was very low awareness and understanding of the other allowances. When asked about the trading allowance, only a couple self-employed participants had heard of the term and only a minority knew exactly what it meant. Others were aware that there was a tax-free allowance, and some knew the amount, but they were unsure of what it was called. Those who were aware of the allowance were confused about how this worked alongside their personal tax allowance.

3.30. Awareness and understanding of the capital allowance was very low. Some self-employed and foreign income participants said that they had heard of the term, and some said they believed that it may be related to a business’s capital, but they did not associate it specifically to assets in the business. Others, particularly those in the landlord and foreign income groups, seemed to confuse capital allowance with capital gains tax, believing it to be a tax which applied when a property or asset was sold.

“The amount of capital you're allowed to keep in your business.” - Self-employed, Registered

3.31. Similarly, there was low awareness and understanding of the property allowance among the landlord group. Only a couple of participants were aware that the allowance meant a landlord could receive a certain amount of tax-free income from renting a property, but no one was able to give a specific amount.

“I’ve heard of it, yeah … there’s a certain amount you can make on a property, buying or renting it out, before you pay any tax on it.” - Landlord, Registered

3.32. Participants were generally unconcerned by their lack of awareness and understanding of these allowances. Some participants in the foreign income group felt they had good knowledge of the allowances that were relevant to them, and some said they did not pay attention to allowances they felt were not relevant to them. Across the groups, there appeared to be an expectation that someone else would inform them of these allowances if they were relevant. For those who used an accountant, many relied on them. Participants did not seem to think they needed to engage with the details. Others were reliant on friends and family or on third-party organisations for advice and it seemed that some of the better-informed participants had found their information this way.

“My friend who’s a tax accountant, she helped.” - Landlord, Not registered

3.32. Participants who did not have an accountant or another source of reliable advice felt that HMRC should do more to raise awareness of tax obligations and allowances for people new to ITSA. There was a strong sense among some participants that it was HMRC’s responsibility to inform them rather than their responsibility to inform themselves. Some expressed reluctance to contact HMRC for advice because of a fear of sounding silly or because they thought it may attract unwanted attention to their financial affairs.

“HMRC should do a marketing campaign ... and spell it out in layman’s terms ... people don’t want to have to call HMRC because then you're on their radar, then they'll be looking and poking into your affairs ... I wouldn't call them for advice." - Landlord, Not registered

3.34. Very few participants were familiar with the terms notification of liability or notification of chargeability, and none were able to confidently define what either term meant. Some participants thought either or both types of notifications could happen when a taxpayer has:

• exceeded their allowances and needs to notify HMRC that they are liable for tax

• exceeded their allowances and HMRC needs to notify the taxpayer that they are liable for tax

• provided information about their income and HMRC notifies them of the amount of tax to be paid

• missed the deadline for paying their tax and is notified by HMRC

“Seems to suggest that HMRC would send you a message to say; by the way you are liable for this tax that you haven't paid yet.” - Foreign income, Not registered

Budgeting for tax

3.35. Nearly all participants stated they were confident in their ability to budget for tax. This was the case despite most having been unaware of the support options HMRC offered.

3.36. The self-employed group had the biggest range of confidence levels, with some participants saying they were very confident, some saying fairly confident, and a couple saying they were not very confident. Both of the participants who said they were not very confident did not have an accountant and had not yet registered for ITSA. All other subgroups generally had high confidence in their ability to budget for tax.

3.37. The most common method of budgeting mentioned by participants involved setting aside a certain amount of money each month to put towards their tax bill at the end of the year and to meet any unexpected costs. This was typically in the range of 10-50% of income. Some participants set aside the exact amount needed to cover their tax, with several having assistance from an accountant to calculate this. Others were just setting aside a less specific amount of money, either a percentage of their earnings or just small amounts which they could afford to put aside. A minority were advised by their accountant to set aside more money than they previously had been. Landlords were more likely than other groups to mention that they had separate accounts for tax as well as for maintenance of their properties.

“Probably 20% and a little bit more - I get paranoid I've not put away enough.” - Self-employed, Registered

“At the absolute minimum, putting aside anything is better than nothing. At the moment I just want to invest in stock, marketing etc … small amounts is better than not planning at all.” - Self-employed, Not registered

3.38. Another key method of budgeting mentioned by a number of participants was using accounting software. Online accounting was widely used to track business transactions as it left an automatic trace.

“[Accounting software name]’s brilliant. Very user friendly - easy to use for businesses starting out.” - Self-employed, Registered

3.39. Using spreadsheets was another common approach to budgeting. Those who used spreadsheets had been doing so for years and stated that they were comfortable with this method.

3.40. While all participants in the landlord group said they budgeted, there was a small number of participants in the self-employed, foreign income and dividends groups who said they did not budget at all. Several of these participants did say, however, that while they did not specifically budget for it, they were confident they would have enough money to cover their tax bill.

“I don’t. I’m bad!” - Foreign Income, Registered

[Participant doesn’t budget, but says they have a] “rainy day bucket to cover a tax bill” - UK Dividends, Not Registered

Use of support options

3.41. Overall, there was low awareness of the support options available from HMRC, including the Budget Payment Plan and Time to Pay. Only a few participants were aware of the support available, and a smaller minority had used a support option. Those who were aware of the support options but had not used them stated they had seen messages about them while completing their ITSA form or had heard about the support options from others.

“When I submit my self-assessment, I always see a message saying 'if you've got any problems paying get in touch and we can work out a plan' … I'm sure there are tools people can use beforehand." - Foreign income, Registered

3.42. Whilst most participants were not aware of the support options, they were pleased to hear that such options were available if needed. Although some assumed that there might be some support options for those who contacted HMRC if they were struggling to pay their tax, they did not know what type of support would be available or who would be able to use it.

3.43. Participants across the groups felt that HMRC should increase awareness of the support options they offer. Many felt taxpayers, including themselves, may find this reassuring information to know and as a result could help those who may be struggling to meet their tax obligations.

"100% …I did not know there was any support, so if you don't know there is any support, how are you supposed to access it?” - Self-employed, Not registered^

3.44. Participants suggested HMRC could increase awareness of the support options available through:

• television and radio advertisements

• social media advertisements

• direct email and text messages

• a booklet sent in the post to taxpayers registered for self-assessment

• pop-ups on the HMRC self-assessment pages

• through third parties including accountants

3.45. Some participants felt that raising awareness of these support options could help to improve the public perception of HMRC and mean that self-assessment taxpayers may feel more confident in approaching HMRC if they needed help. Some did assume that HMRC may not want to promote these options too widely, suggesting the department would prefer most people to pay the total sum when it is due rather than using the support options as a first resort.

“I can understand why perhaps they don't want to promote it too much ... maybe they think it might create problems with people paying in instalments, maybe they miss a payment and get into debt ... maybe HMRC want people to pay in one go?" - Self-employed, Not registered

3.46. Very few said that they had experience using the support options. One participant explained that they had fallen into arrears after experiencing a bereavement. They contacted HMRC to discuss the arrears and described the advisor they spoke to as empathetic and understanding. The participant was happy with the outcome, which allowed delaying payments for a few months and instead arranging a payment plan. They stated their surprise towards HMRC’s response to their situation and felt if more people were aware of the support options available, they may be more likely to approach HMRC when they need support in order to meet their tax obligations.

“They said I could leave it a couple of months ... they even asked me when a good date was to call me back ... they did not send me any letters and did not receive any calls during that time ... they called back pretty much to the day." - Landlord, Not registered

“When we think of HMRC, all we think about is what we have to pay them … not that they can help you, and that they offer support and information … there is no positives to that word [HMRC] … if someone had a problem, they'd be more encouraged to turn to them for help, rather than turn away from them." - Landlord, Not registered

3.47. As most participants across the groups were unaware of the support options available, they were unsure about what was meant by ‘support’. Some assumed this meant personal third-party support from an organisation such as Citizens Advice. Others assumed that it meant more general information and guidance provided by HMRC either by phone or via the HMRC pages on GOV.UK. When participants were asked what additional support they would like HMRC to provide, participants shared a number of ideas, including:

• a free-to-use HMRC app which provides self-assessment taxpayers with basic accountancy tools so they would not need to pay for software

• anonymous support and tools, including a tax calculator and webchat, for those who are concerned about attracting the attention of HMRC if they use online tools or the helpline

• a dedicated helpline to support those who are setting up as self-employed or as a landlord for the first time

• a booklet or online tutorials to guide new SA taxpayers through the process for registering for tax as well as explaining some of the more complex aspects of their tax obligations

• guidance and support with budgeting for tax

• providing a named advisor to SA taxpayers who they can approach with any questions or problems

3.48. When participants were asked how SA taxpayers could be encouraged to use digital software for managing their taxes, participants mentioned HMRC should explain the potential benefits of using the software. Some went further and suggested that HMRC could provide an incentive to SA taxpayers who use digital software, for example, through a reduction in their tax bill.

“Explaining the benefits of using digital software [and how some platforms basically do it for you] would probably help people who have concerns.” - Foreign income, Registered

4. Experience of and views on ITSA Registration

4.1. This chapter explores participants’ experiences and views of the ITSA registration process. It covers how easy or difficult participants found the experience of registering for ITSA and the reasons behind this. It then outlines the timings of registration; why participants chose to register when they did or why they had not yet registered. Finally, it explores whether participants used any tools or guidance from HMRC during this process.

Experiences of registering for ITSA

4.2. The majority of those who had already registered for ITSA had done so themselves and found it straightforward. Several described the process quite simply as logging on, filling in some basic details and then receiving their Unique Taxpayer Reference (UTR) number. There were no clear differences between the different participant groups as to how they found the process.

“Didn’t think there was anything that difficult …the form was straightforward." - Self-employed, Registered

4.3. In several instances where participants’ accountants had either assisted them with the process, or completed the registration for them, these participants tended to find the process fairly easy, with the main task being to send the accountant all the relevant paperwork.

“Easy in my case. I had help from the tax office and my accountant. He was really helpful. I gave all information to my accountant and he did it.” - Self-employed and landlord, Registered

4.4. A few did report difficulties with registration, including:

• difficulties in getting a UTR number. A couple of landlords said it took a long time for their number to come through

• issues with accessing Government Gateway account. A small minority of self-employed participants accidentally typed in the wrong credentials in the Gateway and were locked out of their Gateway account, meaning they had to be sent a new password in the post. One method of addressing this problem was to engage an agent to complete the registration for them, rather than trying again themselves

4.5. One self-employed participant had experienced a previous issue with their National Insurance number as their name had been misspelled when they initially received it at the age of 16. This meant that when they applied for ITSA, the HMRC system did not recognise their identity; something they had to resolve over the phone with HMRC. Some participants also found it difficult to understand what category they fell into for tax purposes, for example if they had multiple income streams, which made their registration process more challenging. Participants sometimes spoke about the ‘HMRC website’ when discussing these matters, however it is likely that they are referring to the HMRC pages on GOV.UK.

“Nothing was easy except finding the HMRC website! Understanding the categories I fell into was difficult.” - Self-employed, Registered

4.6. In terms of getting help or guidance with the registration process, several participants said that they had a positive experience of using the HMRC pages on GOV.UK, as they found this helpful for finding information and resolving any queries that they had.

“Straightforward, thought it would be a long process, all the information was on the HMRC website.” - Landlord, Registered

4.7. Among participants who had sought support through the telephone helpline, there were some frustrations with how long it took to get through to an advisor. However, participants generally found the telephone helpline helpful, as problems were resolved quite quickly once they managed to get through to the right person. Only a few said they found that both telephone and email communication with HMRC could be quite slow.

“You can speak to them, and it does help, but you are on the phone for ages waiting to be connected.” - Foreign income, Registered

Timing of registration

4.8. The timing of registration depended on participants’ knowledge and awareness of the notification deadline. Those who were less familiar with the deadline tended to register earlier, to “get it out of the way” and be able to just focus on the business at hand. Those who registered after a few months were more likely to be familiar with the notification deadline and plan their registration around that. The source of income (self-employed, landlord, foreign income, dividends) did not seem to have a bearing on this knowledge and awareness.

4.9. For those who registered as early as possible, some mentioned doing this before they had even started out, the reason given for this being a desire to be ahead of the process and ensure everything was done correctly. Participants who said that they registered immediately or before they officially began receiving any income included a range of subgroups, but they all tended to be in the lower income categories (under £5,000). Generally, those who registered early had less knowledge and awareness of the 5 October notification deadline and said they had done so to avoid any issues with HMRC.

“I started putting paperwork together the day after I bought the house. I took it as quite urgent.” - Landlord, Registered

4.10. Participants who used an accountant tended to register promptly, with a range of between one day and two months. Those who hired accountants prior to registering said they were advised to register early so that the accountant could “get on with their job”.

4.11. Among those who left registering for a while, some stated they had registered a few months after starting out as self-employed. Generally, these participants had more knowledge and awareness of the notification deadline, so were more likely to wait.

“I registered 4-5 months after I first started to do work as a Supporting Artist.” - Self-employed, Registered

4.12. There did not seem to be any particular types of participant who had not yet registered; there were a range of subgroups and incomes. Having an accountant also did not seem to have an impact on whether participants had registered for ITSA. However, several participants who had not registered but had an accountant mentioned that their accountant had informed them they would need to register.

4.13. Most of the reasons for not registering centred around having the time available and perceived eligibility. The most common reason given for not registering was simply that they had not got round to it or had been focussing on other things. This was the case for several self-employed participants and landlords, as registering for ITSA was seen as lower down the priority list for them than other more urgent tasks related to setting up their business or doing work on their rental property.

“I haven't got round to it yet.” - Landlord, Not registered

“I had to put a lot into starting the businesses. I thought I'd wait until everything was in place before I registered.” - Self-employed, Not registered

4.14. Uncertainty and confusion about specific contexts, such as having multiple income streams, was also a reason to put off registering. Participants with multiple income sources flagged the need for clearer information on how to register correctly in their case, for example, if they run two different businesses, or have both foreign income and from self-employment.

4.15. Another reason participants had not yet registered was that they believed they had not yet earned enough income to begin paying tax. Several participants also said that they thought they had to register after a year, so didn’t think they needed to yet.

“I’ve not generated enough to declare anything yet.” - Landlord, Registered

“Because I feel I'm not eligible. I looked online to see if I was, but I'm not at the moment because I don’t meet the £1k threshold.” - Self-employed, Not Registered

4.16. There were also multiple participants who stated that they were purposely putting off registering. These participants perceived registering as likely to be a time-consuming process that would require a while to gather all of the paperwork beforehand. Registering was seen as a hassle and a potentially unnecessary administrative burden. From this point of view, filling in all of the forms and logging every business expense was seen as burdensome and potentially pointless, especially if it was likely that they would not have to pay anything at the end. A small minority also expressed worry about potentially “doing it wrong” but were planning to seek advice from an accountant to help with this.

“The reason why I haven't done it is because genuinely there has been nothing to do with it. I'm imagining I'm going to lose at least a day of my life. Again, as far as I see it, it has to be done. I'm very much aware the financial year ends 5^th^ April.” - Self-employed, Not Registered

4.17. The October deadline itself was not thought to be an issue, although some participants did suggest that it could be pushed back to December so it would be in line with the calendar year. Others questioned the need to separate registration from the notification deadline and thought it would be simpler to allow taxpayers to register and then immediately complete a self-assessment return.

“If you registered in July, you need to do your self-assessment on this date." - Self-employed, Registered

4.18. While there were no strong feelings about the timing of registration, participants who were already registered did discuss how the speed of registration, support available and clarity of information during this process could be improved. The length of time taken to receive a UTR was highlighted by several participants as a frustration with the process. Some waited many months to receive their UTR and felt that it should not have taken so long. They also felt that sending the UTR by post caused further delay and questioned why this could not be shared securely online, for example, through their personal tax account.

“We are still waiting for them to send out paper letters. If there was a more secure [and quicker] way of doing it that'd be better … you're waiting 4/5 days for a letter … a portal would be more secure." - Self-employed, Registered

Use of tools and guidance

4.19. In general, awareness and usage of the tools and guidance offered by HMRC was low. Most participants didn’t use the tools or guidance available via the HMRC pages on GOV.UK when completing their ITSA registration. Several participants said they were not aware there were any tools available.

“Looked through them but did not use any of them. They were pretty basic.” - Foreign income, Registered

4.20. Of the few participants who did look at the tools and guidance, this involved briefly looking at the Budget Payment Plan or the guidance on record keeping. A minority of self-employed participants said they did use the guidance, but as the PDF document was so lengthy, they found it easier to just look at the bullet points rather than read the whole document.

4.21. Some participants said they had a brief look at the tools available but did not use them. Several noted that the tools used a lot of ‘jargon’, making guidance difficult to understand.

“I had a quick look but did not use them. There need to be more videos and visuals rather than just jargon words.” - Landlord, Registered

4.22. Participants were more likely to use other sources of guidance such as YouTube, online webinars or searching elsewhere for advice. Accounting software and video tutorials were suggested as useful forms of support, and some suggested that if HMRC produced these forms of guidance they would be more likely to use them.

“I couldn’t find much support on the website so looked at some YouTube videos around setting up as a business.” - Self-employed, Registered

4.23. Some participants also stated that they did not use the guidance because they were already confident in their own budgeting and organisation methods, which usually involved using their own spreadsheet, or a method of filing paper receipts and invoices.

4.24. A number of participants felt that HMRC should do more to publicise the tools and guidance options available, suggesting that if people felt HMRC wanted to support them, this could also help them to feel more positive towards HMRC.

“I remember how I felt when I first registered. I felt lost. I had built up an expectation of something overly complicated. Anything that can help [make people feel less anxious] would be a big help.” - Foreign income, Registered

“It's a bit annoying when you feel like it goes against small business owners versus massive corporate entities that should be paying billions of pounds in taxes.” - Foreign income, Not registered

5. Reactions toward more timely and frequent payment of tax

5.1. This chapter explores participants’ reactions to paying tax based on in-year liability and more frequent payment of tax, including their views on the potential positives and negatives of these options and how they think they might work. It also discusses participants’ views on paying tax by direct debt.

Paying tax on in-year liability

5.2. Participants’ initial reactions to the idea of paying tax based on in-year liability were generally positive, especially among those already registered, whereas it received more mixed opinions from those not yet registered due to uncertainty about how it would work. However, on further exploration, there were uncertainties about how it could work in practice and whether it would work for them personally. There was some confusion about what paying tax based on in-year liability meant exactly and some participants tried to make sense of the idea by comparing it to paying tax via PAYE or quarterly VAT payments, which they considered may be appropriate “for some people”.

“More like PAYE? …Because I do that in my permanent role, it wouldn’t be an issue.” - Self-employed, Registered

5.3. After considering the idea of paying tax based on current in-year liability, participants discussed several potential benefits and drawbacks as well as questions they had about how it might work.

5.4. The main potential benefit identified focused on avoiding having to worry about paying a large tax bill in the future. Many participants across all groups talked about the psychological burden of the current system which meant they needed to be mindful of the tax they would need to pay on their current year for a substantial length of time. Participants who talked about this felt that paying tax based on current in-year liability may relieve this burden as they assumed they would be able to pay smaller sums, more frequently.

“If they could do it in a way that there's no dread at the end of the year." - Self-employed, Registered

5.5. This approach was also seen to have some practical benefits. Participants, particularly in the foreign income and self-employed groups, mentioned the current challenge of ensuring they put aside and account for enough money to cover the current year’s liability and the bill when it was due. While participants who were already registered did not say they had struggled with this personally, some said they had needed some time to get used to this aspect of financial management and felt that it would be easy for others to find themselves in difficulty or unable to pay on time.

“A great idea. It took me a while to get used to saving in preparation for paying tax … if it was calculated on money in/out balance it would save some people from nasty surprises." - Foreign income, Registered

5.6. Some participants felt that a current in-year payment approach would also make it easier for them to have an accurate picture of their finances, and to have more clarity on how much money they had available. These participants likened this approach to PAYE, suggesting that if they paid their tax based on current liabilities, they would be able to give an accurate declaration over a specific period and would know that any money left was theirs to spend.

“If it was done more regularly - almost like getting your salary and then paying tax, it would be easy to manage." - Self-employed, Registered

5.7. Finally, some participants, particularly those who were already registered, suggested that paying tax based on the current year would make them more financially secure and resilient than under the current system. These participants typically referred to the challenges faced by themselves or others during the COVID-19 pandemic when, during a time of financial difficulty, SA taxpayers needed to pay tax based on previous, stronger years. They felt that paying tax based on the current year could help those who are starting out, or who experience difficult years, to be more resilient as they would have the opportunity to end their year with no tax outstanding.

“That would be more beneficial to those who aren't doing as well this year as previous years. If you have a hefty tax bill from last year it can be hard." - Self-employed, Registered

5.8. While participants across the groups could see potential benefits to paying tax based on current in-year liability, there were concerns about how this would work in practice, and the impact it might have on them or their business.

5.9. For many of those who were already registered for ITSA, changing their approach to thinking about and paying their tax was not particularly welcome if they felt they had a good system in place. While participants saw that paying in-year could be easier, they were reluctant to change to a new way of working. Specifically, participants who had a system in place which meant they did not spend much time managing their tax, were concerned that changing to an in-year system would create a greater administrative burden for them.

5.10. Many participants questioned whether they would even be able to accurately calculate their tax liability in-year and so were unsure if this system would be workable for them. This issue, raised by all groups of participants, centred on the potential impact on their ability to meet unplanned or unforeseen expenditure which would affect their profits. Some participants, particularly landlords and the self-employed, highlighted the costs involved in getting started which meant that they did not make a profit for several months in their first year.

“I would be a bit apprehensive especially just starting, you wouldn’t have any income at the start.” - Landlord, Not registered

5.11. Others discussed the possibility of wanting to invest income into their business later in the year, or of needing to deal with a large, unexpected cost such as a landlord needing to make urgent repairs to a property. Participants who raised this issue said that they did not understand how they would be able to accurately calculate their profits in-year. Some went further and suggested that an in-year approach may create barriers to them in being able to invest or make urgent payments when needed.

5.12. There were also some concerns about what paying tax based on current in-year liability would mean in practice. Some participants, covering all groups, questioned if paying in-year meant they would need to predict their income over the entire year and make tax payments based on that figure. This was something these participants wanted to avoid as they did not feel they could accurately forecast their income. They were concerned that an inaccurate prediction could result in an overpayment which they would need to reclaim, or an underpayment leading to a tax debt. This was felt to be a particular issue for someone starting out in self-employment or as a landlord as they may be unsure how their first few years would go.

“I wouldn’t like the idea of trying to predict something…I don’t think I can predict what I will earn.” - Self-employed, Not registered

5.13. Participants had the following questions about payment of in-year liabilities:

• will I need to predict my income and profits?

• what if I pay tax but then need to make a purchase, or decide to invest, and this reduces my profits and tax liability?

• what if I over or underpay?

5.14. Confusion about how payment of the current in-year liabilities could work meant that participants were reluctant to suggest a payment model. Many participants focussed on frequency of payments, suggesting set times during the tax year such as monthly or quarterly to pay their tax. Due to some of the concerns raised, participants felt that in-year payments should be presented as a choice to SA taxpayers, rather than imposed upon them.

5.15. Very few were concerned about how this system might affect their in-year cashflow, and suggested that they could pay into an account with HMRC that would allow them to pay towards their tax bill rather than clear it and would allow them flexibility in-year.

”[I’d] rather contribute to an account balance - similar to a bank account with the HMRC” - Self-employed, Registered

5.16. Another suggested that many of the potential drawbacks to in-year payments could be avoided by keeping the current system but simply bringing the self-assessment and payment deadlines closer together. They suggested submitting their ITSA return, finding out how much tax they need to pay and then paying the tax all within 30 days. This would mean that the money they use to pay the tax for a financial year was also generated during that year.

5.17. Overall, participants from all groups were generally positive about the idea of paying tax based on their current in-year liability. Landlords who felt that they had a reliable monthly income felt that in-year payments could be very simple for them, although they were also likely to be more worried about large, unexpected costs than other groups.

5.18. Self-employed, foreign income and dividend participants were also generally positive, especially if their incomings and outgoings were stable. However, registered self-employed participants seemed more averse to changing their approach and were more concerned about it creating a greater administrative burden. Foreign income participants were the most concerned about being constrained in their ability to invest in their business with an in-year payment approach. There were no clear differences in overall views between those who were registered and those who were not, although registered participants did tend to focus more on the administrative burden of managing tax.

More frequent payment of tax

5.19. Participants were also generally positive about the idea of more frequent payment of tax. Most assumed that more frequent payments would go hand in hand with in-year payment of tax and the two ideas were discussed somewhat interchangeably by most. There were a number of possible benefits and drawbacks raised about the idea of more frequent payments, many of which overlapped with those discussed for in-year payments.

5.20. The main potential benefit discussed by participants was that more frequent payments may assist those who struggle with or fail to budget for their tax. The assumption was that more frequent payments could make it easier for participants to manage their finances as they would only need to plan for tax payments over a short period. Some compared more frequent payments to the PAYE system as they found the idea of paying tax regularly, and knowing that what is left is theirs to spend, appealing.

“If it was done more regularly - almost like getting your salary and then paying tax, it would be easy to manage." - Self-employed, Registered

5.21. As with in-year payments, participants felt a potential advantage of more frequent payments would be no longer having to think or worry about a large tax bill over an extended period. Linked with the budgeting point above, many participants across the groups saw their tax bill as a psychological burden and the prospect of being able to pay tax more frequently and begin a new period with all their taxes up to date was extremely appealing for some.

“It might be helpful; I like to be on the front foot of payments." - Self-employed, Registered

5.22. Although participants were generally positive about the idea of more frequent payments, they did raise several potential drawbacks or complications. These centred on practical barriers to making payments more frequently as well as the opportunity cost of more frequent payments.

5.23. The main potential barrier identified was the additional administrative burden it may create. Registered participants who currently manage their tax in one go over a few days a year, assumed that more frequent payments would mean more time and energy spent on managing their taxes for no real benefit to themselves. These, mainly self-employed, participants were resistant to any changes which would take up more of their time to ultimately achieve the same outcome.

“I like the grace period where I can go back over the past year and look over my receipts." - Self-employed, Registered

5.24. The remaining barriers discussed were based on questions about how more frequent payments might work. Specifically, whether the taxpayer would need to predict their income and pay tax on that prediction, and whether it would be based on income received during the period or on income invoiced.

5.25. Both landlord and self-employed participants questioned what would happen if their income suddenly dropped, for example, due to non-payment of rent or invoices, or loss of a tenant or work. They also said that as invoices or rent can be paid late, they may find themselves having to pay tax on income they have not actually received.

5.26. As discussed in the in-year payment section above, many participants were concerned that more frequent payments would reduce the level of control they would have over their income. Most of these participants focussed on the possibility of not being able to make investments later in the year as they may have already declared a portion of the money they would use for this as profits and would thus have paid tax on it. Others simply felt that there would be no tangible benefit in paying their taxes more frequently as the current system allows them to keep control of and accrue some interest on the money earmarked for tax.

5.27. Finally, uncertainty and assumptions about how a more frequent payment system could work led many participants to being concerned about the prospect of making over or underpayments. Ultimately, many participants did not think it would be possible for them to accurately calculate their tax in-year which would mean they would either overpay, and need to seek a refund from HMRC, or underpay, and be faced with an unexpected tax bill in the next tax year.

“You might be paying too much and then you have the hassle of trying to claim it back. I would be a bit scared about being overcharged.” - Landlord, Not registered

5.28. Participants had the following questions about more frequent payment of tax:

• what will tax payments be based on? Predicted income, income invoiced or income received?

• what happens if my income changes?

• what happens if I need to make a large payment which will affect my profits in a period I have already paid tax on?

• what happens if I over or underpay?

5.29. Participants suggested that payments could be monthly, quarterly or every six months. Monthly was preferable to participants who did not envisage having any practical barriers to more frequent payments and who found the idea of paying small, regular amounts, appealing. Quarterly payments were seen as striking a good balance between making tax payments smaller and more manageable but without creating significant additional administrative burden or cashflow issues. A couple of participants suggested that payments every six months could provide some of the benefits of more frequent payments and avoid the concerns that some participants had about losing control over their in-year income.

5.30. Overall, quarterly payments was the preferred frequency, but most participants thought payment frequency should be flexible and decided by the taxpayer. Even participants who were positive about the idea of monthly in-year tax payments believed that this approach should not be imposed on them, or on anyone else.

“It should be a choice; I wouldn’t want to make it easier for me but more complicated for someone else." - Self-employed, Registered

5.31. The potential impact that more frequent payments may have on cashflow was a key concern for many participants across the groups. Participants felt that the main benefit of the current system is that SA taxpayers have control over their income throughout the tax year, allowing them to invest and to cover unexpected expenses at any point in the tax year. In the current system, if a landlord needs to replace a boiler, it does not affect their tax payments whether this happens in the first month of the year or the last. The concern with more frequent in-year payments is that a large outgoing in the last few months of the year could mean that the landlord has overpaid tax in previous months or quarters.

“[I’d rather] have enough money to keep the property going and to potentially invest in other ways.” - Landlord, Registered

5.32. Further, while many made favourable comparisons to the PAYE system, others highlighted that their incomes did not work this way, that income can be irregular and sometimes payments can be received months after they were due. While paying tax in a more ordered and structured way was appealing for many, it was not seen as desirable or even workable for those whose income was not similarly ordered or structured.

5.33. There were no clear differences in the views of different groups of participants on more frequent payments, with examples of participants from all groups being in favour of or against the idea. The potential benefits and drawbacks raised suggest that openness to more frequent payments may be more linked to attitudes to financial management and tax rather than by income source. The idea was appealing to participants who valued being ‘debt free’ as they focussed on the benefit of being able to avoid having a looming tax bill and of starting each month, quarter, or year with a clean slate financially. Others focussed on the opportunities and control that the current system provides, and they were reluctant to give this up for what they felt would be no tangible financial benefit.

Paying tax by direct debit

5.34. Participants across all groups thought it would be a good idea for HMRC to offer the option of setting up a direct debit, but most were fairly negative about the idea of setting one up to pay their own tax. Negative reactions stemmed from either a general dislike of using direct debits or a reluctance to use one for tax specifically. These participants seemed to link direct debits to having a lack of control over their money and they disliked the thought of anyone being able to take payments from their account. A few participants also mentioned previous negative experiences of direct debits set up to pay other organisations, for example, the incorrect amount being debited, being debited at the wrong time, or with amounts being debited twice. Overall, those who were negative about direct debits said they preferred to make payments themselves, when they were happy that the amount due was correct, and they were able to pay it.

“Not Direct Debit - I wouldn’t trust that. You can’t control that - I couldn’t be confident they'd be taking the right amount and it could leave me short." - Self-employed, Registered

5.35. When thinking about using direct debits for paying tax specifically, a further issue raised was that HMRC might take money from their account before the sum that was being taxed had been received. This was a particular concern for participants who were landlords, and who questioned what would happen if a tenant did not pay their rent on time and if HMRC attempted to take money that was not available. More generally, participants felt that this is likely to be a concern or problem for most newly registered SA taxpayers. After factoring in set-up costs and how long they may need to wait to start receiving income, they may be unlikely to have much, if any funds, available in their account for the first few months, or even longer.

5.36. The participants who were open to the idea of paying tax by direct debit tended to be the same ones who were keen on the idea of more frequent in-year payments. They were participants who liked the idea of not needing to budget for tax or think about large tax bills. For these participants, giving up some control over their money was worth it if they could reduce or eradicate the burden of thinking about, and budgeting for, lump sum bills.

“I'd feel that’d be OK for me …at least I’d know I’d paid.” - Self-employed, Registered

5.37. As with the other proposed changes, participants were positive about offering direct debits as an option and of offering as much flexibility as possible with how it is used. One suggestion was that SA taxpayers could be given the option to set up a direct debit monthly or quarterly to pay towards their tax bill, rather than to aim to pay the exact tax owed for the period. This, they felt, would allow for more flexibility, and reduce the likelihood of overpayments.

Key considerations for the proposed changes

5.38. While participants from all groups were generally positive about the idea of more timely and frequent payments, as well as the option of paying tax by direct debit, they were unsure if some or any these changes might suit their needs.

5.39. Uncertainly about how tax liabilities would be calculated in-year and the timing of more frequent payments raised a number of concerns for participants about how this would affect their cashflow and the control they have over their money. Participants across the groups were clear that what might work for them, may not work for someone else, highlighting that one size generally does not fit all. They believed that providing SA taxpayers with more options and flexibility to choose the timings and setting that works for them would be the best outcome.

“Every trade, business, every industry … the way people earn is so different. It is really difficult to have a one-size-fits-all [approach to paying tax.]” - Landlord, Not registered

6. Recommendations

6.1. Based on the analysis of the 40 depth interviews, IFF Research recommend the following actions to improve awareness and understanding of ITSA obligations, and to improve the chances of the successful introduction of the possible changes to policy explored in the research.

Raising awareness and understanding of ITSA

Focus more attention on raising awareness of the finer details around ITSA rather than on the need to register for ITSA and on timings.

Among the participants there was a widespread awareness of the need to register, and the rough timings involved were easy to find out and understand. Overall, while most found the actual process of registering straightforward, they were far less clear on allowances and understanding of when they became liable to pay tax varied (e.g. becoming ‘established’). Therefore, rather than a lack of awareness of their obligations (in a broad sense) leading to people making mistakes, it would appear to be a lack of understanding of their obligations that causes mistakes. Raising awareness of, and educating people on the finer details, would be most beneficial to those who do not use the services of an accountant as they do not have the support structure in place that would allow them to take a 'hands-off’ approach.

Target an awareness campaign at ‘accidental landlords’.

The research participants who had inherited property appeared to be less certain of their obligations than others. ‘Accidental landlords’ were naturally less prepared and had lower awareness of their obligations as they did not intend to become landlords. For ‘accidental landlords’, engaging with these matters was stressful and they may be more likely to make mistakes. This group would therefore stand to benefit the most from targeted messaging on ITSA.

Make the support options more visible to reassure those who are registering for ITSA for the first time.

Although most of the participants did not use support options and it was unclear how likely they would have been to use them had they been aware, they did state that just the knowledge that such options exist would have been reassuring. There was also a desire for improving accessibility of support by phone by increasing the number of operators available to take calls and making the phone number easier to find on the GOV.UK website. Additionally, participants suggested ways in which the online guidance could be improved – by adding short videos explaining how to approach different scenarios e.g. what to do if they have more than one source of income, or if they have multiple streams of foreign income, or if they are a landlord in Northern Ireland.

Policy changes around ITSA registration and payment of tax

The timing of registration can remain unchanged.

There was no strong desire among the research participants to change the timing of registration and participants perceived no particular benefits associated with a change. When asked for alternative timings, responses indicated that participants would want as little disruption as possible to their routine and that dates should be easy to remember. If timings were to change, there would need to be a very clear rationale and fit around existing dates in the financial calendar (as opposed to being an entirely new date added to the financial calendar).

To a large extent, the perceived benefits of paying tax based on in-year liability and more frequent payments mirrored each other. To gain public support for the overall package of proposed changes, promote the following messages:

• helps to avoid ‘nasty surprises’ as liability is closer to when profit was made, and more frequent payments mean smaller payments

• easier to submit accurate returns as using more recent data

• paying tax based on in-year liability means that profit and tax are more closely linked in the lifecycle of a business – meaning tax for profits in a ‘good year’ would not be paid during a ‘bad year’

To gain support, any changes need to be flexible and phased in gradually.

A sudden change in approach would be very difficult for some to cope with. However, participants were generally supportive of the possible changes so long as the different elements, such as the frequency of payments, were optional. Changes should not be sudden, but rather introduced gradually and flexibly.

Alongside promotional messages, significant effort needs to be put into educational initiatives.

There was a certain amount of trepidation around any change that may be introduced, and participants were concerned that they may not be able to accurately submit returns if the system was to change, as people mostly relied on what they already knew. Any changes that come into place would therefore require largescale awareness raising and educational activities to help people transition to a new way of doing things.

Direct debits should only be promoted as an option which can be used if it works for the individual.

Participants were supportive of direct debits as an option, but they generally would not take it up themselves as they had concerns around a lack of control over cashflow and that the payments may not be in line with their actual tax liability. This could mean they would have to engage regularly with HMRC to either claim back or pay extra tax. Direct debits should not be considered the default payment method, but rather as one of a range of options.

1. Supporting customers to pay their tax on time - HMRC Research Report 557 (publishing.service.gov.uk) ↩

2. More information on this can be found at https://www.gov.uk/guidance/tax-free-allowances-on-property-and-trading-income ↩