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Posted: Wed 8th Jul 2026
8 min read
Thousands of workers running side hustles alongside full-time employment face a radical change to how they pay tax from April 2029, in a move critics warn could stifle entrepreneurship and leave many facing cash flow issues.
Buried in the government's fiscal documents, the plan is to remove the current choice for employees with self-employment income and automatically collect tax owed through adjusted PAYE codes, meaning money will be deducted directly from main job wages before it even reaches their bank account.
The change, which is currently out for consultationset toclose next month, 4 August 2026), HMRC estimates will affect around two million people and could raise £925 million for the Treasury in the first three years. But , founder of and an Enterprise Nation adviser, warns the policy sends a damaging message to people trying to build businesses.
Paula said:
"It's just crazy. You've got somebody who's starting up a business who has the prospect of, every time they're making a modest amount of profit, being taxed as they go along through their PAYE code.
“They've then got to track that the PAYE code is doing it correctly on top of everything else they're doing. And obviously it's taking cash flow from them at the point they need it."
Currently, workers earning extra income over £1,000 from side hustles, whether trading on platforms like eBay and Vinted, freelancing, or running small businesses, file a Self-Assessment tax return and have a choice about payment. If they owe less than £3,000 and file by 30 December, they can opt to spread payments interest-free over the following tax year through their PAYE tax code. Alternatively, they can pay in a lump sum by 31 January.
From April 2029, that choice disappears. HMRC will mandatorily adjust tax codes to collect side hustle tax monthly, based on estimated earnings, potentially using figures from two tax years prior, Paula said.
She continued:
"People are going to be paying their tax every month for their side hustle based on an estimate.
"It will be about in-year payments a lot more than it is now. So you'll be paying in advance – April, May 2029 onwards, monthly."
In the transition year (2029/30), taxpayers could face a "double hit", paying off the previous year's tax bill while simultaneously making estimated payments for the current year, all deducted from their main employment wages.
The new system will operate via tax code changes, which, according to Paula, is a problem. "When did you last see a correct PAYE tax code?" she asked. "They are wrong a lot, a lot of the time."
The issue is compounded by the unpredictable nature of side hustles.
"By definition, no one knows what profit they're going to make really, do they? You're starting out, you don't know. It could be going down. But it's that kind of month-by-month taking it away from you in the current year that you're in, that could cause cash flow problems. Things are so tight for people currently, I don't know how they're supposed to then find this money along the way."
The change doesn't only affect traditional employees. Anyone receiving income through PAYE, including those receiving private and public sector pensions, will be caught.
"If you've retired and you want to set up a business, and a lot of people do – they're going to be affected as well. The tax will be taken directly from their monthly pension,” she said.
The tax code changes arrive alongside Making Tax Digital (MTD) requirements, which are being extended to sole traders with turnover over £20,000 by April 2028 (currently £50,000, dropping to £30,000 in 2027). Or even less if they’re also a property landlord.
"You could have £20,000 turnover and say you're making, if you're lucky, between £5,000 and £10,000 profit. The tax on that is going to be taken away from you in-year.
“So you will have to do quarterly MTD submissions for only earning between £5,000 and £10,000 profit, depending on what you're doing. Plus, make in-year tax payments. And you've got to check your PAYE tax code is getting that right. Who can do all of that?" questioned Paula.
For aspiring entrepreneurs already juggling full-time work with building a business, the combined administrative burden could prove prohibitive.
"It's very off-putting," Paula argued. "What with MTD anyway being at such a low level by then and then knowing that your tax code's going to take something off of you, whatever that might be, it's going to really put you off even bothering, I would say."
According to official documents, in 2025, 1.1 million Payments on Account were missed or paid late. The tax gap, the difference between tax owed and tax collected, stood at 6.4% for 2024/25, amounting to £59.2 billion in unpaid tax. According to HMRC, small businesses represent 62% of that gap.
But Paula suggests the problem may lie elsewhere:
"They talk about this tax gap, but we know lots of people who don’t claim enough tax back, not getting the refunds that they're due. So, this can't be the entire picture.
"There will be a lot of sole traders who don't pay their tax on time, or perhaps they've actually had quite a few unexpected bad debts. But that might be more a reflection of the economy and how poor things are macro-wise for everyone."
With the UK facing stagnant job markets and a cost-of-living crisis, many workers have turned to side hustles to supplement stagnant wages. Enterprise Nation's latest StartUp Ambition report found that for the first time, people were citing financial necessity as a primary driver for starting businesses.
Yet the policy risks dampening that entrepreneurial spirit.
Paula said:
"People are trying to do the right thing, trying to generate some business for everybody's benefit and do something new and help the country's growth.
"We know that a lot will fail. That's normal for the small business world. But what sort of economy do we want? Do we want people just not bothering to try to earn more?”
The government's consultation on "Timely payments in Income Tax Self Assessment" remains open (closes on 4 August 2026). Those affected are encouraged to respond before the proposals are finalised.
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