City partnerships could be forced to take on expensive debt to fund their own partners’ tax bills after the government confirmed a major shake-up of HMRC’s self-assessment regime.

As part of the Budget, Chancellor John Healey confirmed the government announced plans to introduce more timely payments for income tax self assessment (ITSA) from April 2029. This will replace the current system, where those who report tax via self-assessment pay twice a year, with ‘regular’ payments.

According to the government, ITSA taxpayers are “a vital part of the UK economy”, with around 12m people filing a self-assessment return, bringing in £48bn of income tax revenue in 2024 to 2025. One of the larger users of the ITSA is limited liability partnership (LLP) firms and equity partners in law, accountancy, and consulting firms.

Healey said he wants to ensure tax is paid closer to real time, reducing the likelihood of late payments or taxpayers falling into tax debt.

However, experts have warned the move could significantly affect professional services firms.

Nimesh Shah, chief executive, Blick Rothenberg, said: ‘The government’s clear objective is to collect tax sooner – but for LLPs, it could have a significant impact on investment in the business and ultimately how profits are managed and distributed.”

“A switch to more regular tax payments will hit cash flow at a time when professional service firms are already being squeezed by more general economic issues including increases in staff costs and national insurance,” explained David Portman, partner at Lubbock Fine.

In a recent report, the Law Society said it did “not believe this is justified”, and added that it had responded to a government consultation on the plans.

Slow-billing City firms face ‘double-hit’ squeeze

“This is not simply a change to the frequency of partners’ tax payments,” Adam Craggs, tax partner at law firm RPC, said. “It potentially changes the way professional partnerships manage cash, partner remuneration, drawings, capital and financial performance.”

Under the current system, equity partners and member firms file tax returns twice a year: the first by 31 January and the second by 31 July.

“Partners are generally taxed on their share of LLP profits, and many firms set aside money to meet those personal tax bills,” explained Sue Robinson, principal at Ryan Tax. “More frequent payments may mean releasing those reserves sooner and revisiting how much working capital the firm retains.”

At a time when lock-up, the time it takes to convert billable work into cash in the bank, is under constant pressure at firms as clients are being chased to pay bills. The average lock-up days for British law firms in 2026 is 134 days, according to the Law Society Financial Benchmarking Survey.

But the upcoming tax change means there needs to be a renewed focus on lock-up, early invoice raising, and collection. “Firms with slow billing or collection would be likely to feel that pressure most,” Robinson said.

In addition, because tax may be due to HMRC before a firm bills the client, some LLPs may have to dip into credit facilities, extend overdrafts, or take out working capital loans, industry figures warned.

Shah added, “Some partners could see lower take-home distributions as a result.“

The cost of servicing that debt could cut directly into the firm’s bottom line should interest rates rise as many economists expect.

As the ‘regular’ payment has yet to be defined, and further guidance from HMRC on the changes is expected in 2027, concerns have been raised that a potential ‘double-hit’ squeeze could cause a cash flow issue.

Portnam said “the government should consider delaying this proposal”, to give people more time to prepare.

When approached for comment, a government spokesperson said: “This government wants the tax system to work better for working people and small businesses. No one will owe more tax, and moving to smaller, more regular payments will make it easier for millions of taxpayers to manage their money and avoid the shock of large tax bills.”