HMRC Tax Update 2026: Modernisation or More Complexity?

In this episode, Mark Morton unpacks HMRC’s latest Tax Update 26, exploring proposed changes to self-assessment, ISAs, national insurance, and debt collection. He questions whether these reforms truly simplify the system or add further complexity, while highlighting the real-world impact on taxpayers, businesses, and financial planning.

Blog: https://www.mercia-group.com/insights/tax-update-2026-reform-and-changes/

For more information on this topic and more, please visit www.mercia-group.com for further details.

Transcript

Hello and welcome to this podcast. It's Mark Morton here. And just reflecting on something that the Revenue have published in the last few days, what they call their Tax Update 26. Again, another relatively modern sort of process whereby they publish a load of consultations, etc.

It's interesting. If I just read this out to you, it says the documents published relate to the simplification, modernisation and fairness of the tax and customs system. I think you could ignore some of those words, particularly the one that says simplification. It is, I think, mainly a series of policy announcements driven by HMRC rather than the government, which gives me a bit of a concern in terms of powers and so on.

My big concern generally with where we're going with HMRC is the fact that ultimately HMRC keeps saying to the politicians, “Give us more and more powers,” whilst their levels of service go backwards ultimately. So there's got to be a bit of a trade-off here. If the Revenue improved their IT systems, then ultimately they wouldn't have half the contact from the government—or sorry, from the public—that they actually get at the moment.

So, a whole series of announcements. Some of them are interesting. Let's say the review of benchmark scale rates. I suppose that goes hand in glove with the recent announcements on 45p going up to 55p. Of course, it's all well and good, the government saying, “Well, we will review the benchmark scale rates.” There is no guarantee that employers will pay within those rates. So I don't have any objection to the principle, but I think very much like the 55p increase, all well and good, no guarantee that's going to help employees directly in terms of employers paying them, particularly because employers have been whacked on the head in recent times with minimum wage and National Insurance increases and whatever else.

All very laudable, but we will see ultimately how that pans out. And of course, then you see the disconnect between what an employer is prepared to do and the tax relief side of it.

There are some quite interesting things. One particularly took my eye: more timely payments for Income Tax Self Assessment, which has been raised before, which is looking at what people's views would be. Let's talk about consultation for a minute. This is not consultation in the sense of “shall we do it?” This is consultation in the sense of “how are we going to do it?” ultimately.

So this has been talked about before: speeding up the payment of Self Assessment debt for, say, customers with a Pay As You Earn income. So essentially collecting that via the Pay As You Earn system. To be quite honest, I think there would be far better solutions.

It's interesting there is talk about payments on account. This gets me onto the whole sort of hobby horse of MTD. One of the issues with MTD, if you go back in time, was that you were going to submit quarterly accurate information and then pay your Self Assessment liability quarterly. So there's a direct correlation between MTD and speeding up the payments on account system.

Let's say that was broken at a very early stage. So we now have an MTD system which doesn't require you to send accurate information in quarterly. Hence, what is the point? Just abolish it.

But I don't have any great issue with the idea that the payments on account system is a little bit antiquated. So what I would like personally is for Self Assessment returns to be in on time.

I don't think a hundred quid—it's interesting, for somebody who's old like me, I first got into lecturing by presenting Self Assessment seminars for HMRC. Once upon a time, the penalty when SA came in, in 1995–96, for a late return was £100. Thirty years later, it's still £100. £100 wasn't enough to get some clients out of bed 30 years ago, let alone now.

So what I'm going to do, I'm going to change the penalty system to make it £10,000, which will make people pay attention. It will get their returns in on time. And then I'll merely divide their liability by 12 and take it by compulsory direct debit. And I don't have any great issue with that.

It's quite interesting, all these years later, the government talking about actually reforming the payments on account system to do that in a more regular manner throughout the year, which again, in some respects, I would say is a good idea personally, certainly in terms of cash flow. And that is a true modernisation—modernisation into the twentieth century, taking it by direct debit, let alone the twenty-first century.

Quite an interesting consultation floating around about voluntary National Insurance. Does it work well? What is the purpose of it, etc.? It's quite interesting. Where will that lead with the government? There's already been a couple of restrictions put in on voluntary contributions for people who live outside the UK by this government. It may be that we are veering more towards a position where you say, “Well actually, if you don't live in the UK, you can't voluntarily contribute and hence you can't keep your State Pension up,” which would be quite interesting where we ultimately end up with that.

One or two other things. First-time buyer Individual Savings Accounts. I think the interesting thing for me is we had a Help to Buy ISA, which I did for my children, which was a discrete project that said you can only save X; if you save X, the government will add on 25%. So the limit was £12,000. If you buy your first house, subject to certain financial criteria on the first house, we will add 25% on.

I think the interesting thing though is if you're a cash buyer, they won't add on the 25%. The value-of-the-house criteria got overtaken by events, I think, a little bit. Obviously, that then got limited and morphed into the Lifetime ISA.

The trouble in my mind with the Lifetime ISA is, okay, fine, you can save a certain amount of money towards your first house. But of course, if you don't use it for your first house, you can't get it until you're 65. In my mind, talking to a kid at 21 about, “Well, save for a house, but if you don't buy it, you can't have your money back until 65, otherwise you'll lose your tax preferential status,” that account seems a little bit restrictive.

So I think it would be a good idea—first-time buyer incentives that encourage savings. Having said that, of course, the government is saying on the one hand, “Encourage savings,” and on the other hand discouraging it by reducing cash investment in ISAs and also, of course, taxing interest at 22%, 42%, etc. in the future. So there seem to be a few mixed messages.

Interestingly as well, moving on from that point, from 2027 the cash ISA limit will be reduced to £12,000 under an overriding limit of £20,000, unless you're over 65. Of course, we wouldn't want to affect over-65s. I would guess primarily because there are lots of people over 65 and a lot of them vote, which seems a very odd thing.

But there is then some talk about ISA reform. This is driven by what underpins that announcement on the ISA cash cap at £12,000. And the idea there of the government is to force more investment into, particularly, UK stocks and shares.

But of course, just because you say, “Well, you can only put £12,000 in a cash ISA,” it doesn't mean the other £8,000 goes into UK stocks and shares. I suspect my IFA would recommend me not to put it all into UK stocks and shares, so that is a bit limiting.

The government have now got themselves in a tangle because what they've realised is that quite a lot of projects, elements of a stocks and shares and/or innovative finance ISA, may well be cash or the equivalent of cash. So what is now being said is if within your ISA stocks and shares portfolio there is something which smells a bit like cash, then the interest will be charged at 10% to 22%. It will lose its tax-free status.

Now, if I've invested in ISAs since the year dot, how I would know whether any of my portfolio has actually got an element which smells a bit like cash and will be caught by these rules is a mystery wrapped in a conundrum, wrapped in an enigma. That is making life extremely hard and is defeating the point ultimately.

Whether this will be retrospective, whether it will be merely for investments made from 2027, is not particularly clear. We've also then got a rule saying actually transfers from non-cash ISAs into cash ISAs for under-65s will not be allowed, to stop people saying, “Actually, I'll use my cash allowance in a different way.” But now that isn't even limited to £12,000. That's just stopped.

So I think the government have got themselves in a real pickle again, and life is not being simplified or modernised here. It's being made extremely complicated on what purports to be a tax-free wrapper.

In many respects, if I'm honest, if you look at the statistics, not that many people have any savings as a proportion of the population of the country. Those that do have savings—how many are lucky enough to be able to save £20,000 a year?

In many respects, I think you'd be better to say, “Well actually, just forget ISAs.” Who is it benefiting? Relatively better-off, wealthy—whatever term you want to use—in the future.

And I could kind of understand if you said, “Look, we're just stopping ISAs now because it only benefits those with some money.” But you do then say, “Well actually, if you're keeping it, what is the point?” Well, it's to encourage saving. Is it?

Okay. Are we encouraging saving? Are we encouraging pension contributions under this government? Are we encouraging setting up new businesses with the aim of making money, or are we not?

A lot of the policies that have come in within the last two years would seem to be saying, “Well actually, if you've got money, so be it. We don't care as much.” Which is—I don't know. I am struggling to put together what the underlying policy is.

I think what the previous government were doing in some respects was much more attractive. What they were saying is, on top of your £20,000 ISA, there would be a separate £5,000 limit for a British Retail ISA, which I think in many respects, for those that have the money, would be far more attractive to channel money into British stocks and shares by just saying, “If you put money in, that's where it goes.”

Which is not quite what you're saying under these ISA reforms. So yes, quite complex what's going on with ISAs at the moment.

Other things. What else have we got? Quite an interesting point that has been talked about on and off for years, which is removing National Insurance from the Limitation Act.

If you and I go back in time, National Insurance is not a tax and therefore rules have been different over time, particularly in terms of arrears. You have a fairly standard rule: if there's an error within a return, four years to assess; six years if it's careless; twenty years if it's deliberate; and if it's a failure to notify, potentially just a twenty-year flat timescale.

Whereas National Insurance, in whatever context, is a maximum of six. And I have to admit, in my career, six years from what point in time has always been a bit of a moot point because you are not dealing with specific tax rules.

So it'll be quite interesting to see whether the recovery of National Insurance arrears is aligned with tax, which actually would then make it quite punitive because you would be saying maybe you're going from a six-year maximum to a twenty-year maximum, which would be a big change if the Revenue are interested in pursuing that.

So that's quite an interesting sort of change in compliance which you would see flow through ultimately.

There is then something called a Start a Business customer journey review. The Revenue are going to look at how easy it is for businesses to interact with the Revenue from start to finish. Well, I can tell you it's absolute tripe. Let's forget the review. Pull your finger out and start offering a service to your clients again.

So lots of things then to do with digitalisation. Lots of changes, particularly to customs and customs duties being talked about. A lot of compliance. Quite interestingly, an attempt by the government to look at low-value debt and give the Revenue more powers to collect debts directly from customers' bank accounts. They seem to be saying where they won't engage with them.

So again, quite an interesting recovery issue. And this really goes back ultimately to the two big projects the Revenue have at the moment. One is digital by default and the other one is debt collection, ultimately debt enforcement. So you sort of see all of that coming through in these ideas from the Revenue.

Going back to something I said earlier, consultation on making the payment of PAYE compulsory direct debit, which is like drawing us into the twenty-first century again. Ultimately, I can't get very excited about that.

I suppose watch out in the future for quite how these will progress though. Some of them seem bright ideas, but we shall see ultimately where we end up in two or three years' time. And the way things are at the moment, of course, in two or three years' time we could have a different government. We could have had a general election. Who knows what will have happened in two or three years' time?

They are not earth-shattering things, any of these ideas, but some of them are pretty fundamental in terms of how ISAs work or how debt collection works, etc. Lots to get your teeth into there.

There is a quite interesting summary on the government's website if you want to look at that. Yes, good luck getting your teeth into that. But if you're anything like me, you've got enough to cope with under existing rules, let alone worrying about what the rules may be two, three or four years down the line.

That is the tax modernisation, simplification, or whatever else you want to call it. Lots of ideas.

Ultimately, if you want to keep up to date with this or anything else, obviously feel free to sign up to the podcast or, interestingly, just sign up to our Newswire, which is a monthly email that will give you links and insights into all this sort of stuff.

Take care everybody, and I'll catch you again soon. Bye.

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