Spring Budget: self-employed face debt raids & fines

By Katherine Steiner-Dicks Last updated Mar 27, 2025

Rachel Reeves, Chancellor of the Exchequer cracks down on tax debt management

The UK’s self-employed must brace for HMRC’s latest direct debt recovery, penalty fees and filing burdens. But there is some promising news on the horizon: the government is coming down hard on tax avoidance schemes that target independent workers

This article has been updated on 27.03.25

2025 SPRING BUDGET

What is covered in this report:

Side hustlers get some good news
Government to target “tax gap”
- Increased Late Payment Penalties
- Expansion of Making Tax Digital (MTD)
- HMRC Enforcement
- Tackling Tax Avoidance:
More consultations on tax avoidance and phoenixism
- Prosecute more tax fraudsters
- Reform rewards for informants
- Tackle “phoenixism
HMRC cracking down on debt management
Higher late payment penalties for VAT and ITSA taxpayers
IR35 and self-employment scrutiny
Self-employed feeling targeted and not supported

Chancellor of the Exchequer Rachel Reeves voiced her commitment to avoiding further tax increases in her Spring Budget of 2025, stating, “As I promised in the autumn, this Statement does not contain any further tax increases.” However, she stressed the importance of fairness, arguing, “when working people are paying their taxes, while still struggling with the cost-of-living…it cannot be right that others are still evading what they rightly owe in tax.”

To address this, Reeves highlighted previous efforts, noting, “In the Budget, I delivered the most ambitious package of measures that we have ever seen to cut down on tax evasion…raising £6.5bn per year by the end of the forecast.”

Reeves announced in her speech additional measures: “Today, I go further…continuing our investment in cutting-edge technology…investing in the HMRC’s capacity to crack down on tax avoidance…and setting out plans to increase the number of tax fraudsters charged every year by 20%.” These new initiatives are projected to “raise a further £1bn…taking the total revenue raised from reducing tax evasion under this [political content redacted] government to £7.5bn.”

This move is seen as a good thing for most contractors who have found themselves working in the unregulated umbrella market, which has had its share of tax avoidance scheme instigators gone AWOL.

The government seems to be finally cracking down on the criminality of tax-avoidance schemes and those that propagate them, as Dan Neidle of Tax Policy Associates, a not-for-profit aimed to improve tax and legal policy, explains, “There is a mini-industry of creating tax avoidance schemes which have no prospect of success. We don’t believe a single one has succeeded in court in the last twenty years. That hasn’t stopped promoters from collecting millions in fees. The long series of new laws introduced to stop them have been ignored.”

He continues, “The Government is getting serious – for the first time there is a proposal to criminalise the promoters’ activity. If the Government follows through, and HMRC uses these new powers, we could all be billions of pounds better off.”

Side hustlers get some good news

Approximately 300,000 individuals with side hustles, such as online clothing sales or dog walking, will be relieved of the requirement to complete self-assessment tax returns. The government aims to encourage entrepreneurial activity by simplifying the tax process, while also easing the burden on HM Revenue & Customs, which has faced criticism for its customer service. The threshold for trading income before needing to file a return is set to rise to £3,000 annually, a significant increase from the current £1,000.

Government to target tax gap

The government is aggressively targeting the “tax gap,” the difference between owed and collected taxes. To achieve this, several measures are being implemented:

Increased Late Payment Penalties: VAT and income tax Self-Assessment taxpayers, as they transition to Making Tax Digital (MTD), will face steeper penalties for late payments from April 2025.
Expansion of Making Tax Digital (MTD): The rollout of MTD for income tax Self-Assessment will extend to sole traders and landlords with incomes over £20,000 from April 2028. This digitalisation aims to improve tax compliance but will also increase administrative burdens.
HMRC Enforcement: Increased investment in HMRC’s debt management and compliance teams, coupled with the exploration of automated debt recovery, signals a more stringent approach to tax collection.
Tackling Tax Avoidance: New consultations will explore strengthening HMRC’s powers against tax advisors who facilitate non-compliance and promoters of marketed tax avoidance schemes.

These measures will likely translate to a higher initial admin burden for freelancers and the self-employed, who must ensure meticulous record-keeping and timely tax payments to avoid penalties.

More consultations on tax avoidance and phoenixism

The government is arranging new consultations which will focus on how HMRC can make better use of third‑party data to increase automation and close the above-mentioned “tax gap”. The HMRC could soon take action against those tax advisers who facilitate non‑compliance from their clients. Plus, it will devise new measures to close in on promoters of marketed tax avoidance, whose contrived schemes leave their clients with unexpected tax bills. And finally, options to simplify and strengthen HMRC’s inaccuracy and failure to notify penalties.

Here are the consultation proposals:

Prosecute more tax fraudsters: HMRC is expanding its counter‑fraud capability to increase the number of annual charging decisions for the most harmful fraud by 20%, compared to current levels, from 500 to 600 per year by 2029‑30. Additional criminal investigations will focus on delivering a strong deterrent. This will include tackling those who undermine legitimate trade and small business, fraud committed by the wealthy, fraud facilitated by those in large corporations, and by individuals and companies who make it possible for others to hide money offshore. Investigations will also address organised criminal attacks, focusing on illicit finance and complex money laundering schemes.

Reform rewards for informants: the new HMRC reward scheme for informants will be launched later this year, targeting serious non‑compliance in large corporates, wealthy individuals, offshore and avoidance schemes. The new scheme will take inspiration from the successful US and Canadian models, rewarding informants with compensation linked to a percentage of any tax taken as a result of their actions.

Tackle “phoenixism”: HMRC, Companies House, and the Insolvency Service are delivering a joint plan to tackle those using contrived insolvencies to evade tax and write off debts owed to others. This includes increasing the use of upfront payment demands, making more directors personally liable for company taxes, and increasing the number of enforcement sanctions to double the amount of tax protected to £250 million by 2026‑27.

HMRC cracking down on debt management

The government is determined to reduce the tax gap debt. The government said it took significant steps to address the debt balance in the autumn and is going further as per the Spring Budget statement by investing in HMRC’s debt management capacity, including an innovative test and learn pilot to collect more aged debts, and moving towards more automated debt recovery. The government is additionally investing in recruiting 500 more HMRC compliance staff, building on the 5,000 new compliance staff whose recruitment was announced at the Budget last autumn.

Higher late payment penalties for VAT and ITSA taxpayers

The government will increase late payment penalties for VAT taxpayers and income tax Self Assessment taxpayers as they join MTD, from April 2025 onwards. The new rates will be 3% of the tax outstanding where tax is overdue by 15 days, plus 3% where tax is overdue by 30 days, plus 10% per annum where tax is overdue by 31 days or more.

HMRC will re-start “direct recovery” of tax debts owed by individuals and companies who have the ability to pay but choose not to do so. The government will also explore options to automate the process for collecting lower value tax debts.

The increased late payment penalties and the push for stricter tax compliance will likely result in higher penalty fees for freelancers who fail to meet deadlines or comply with regulations. This financial strain, combined with the rising cost of living, could significantly impact the financial stability of many self-employed individuals.

IR35 and self-employment scrutiny

While the report does not explicitly detail major IR35 changes, the heightened focus on tax compliance and the drive to close the tax gap suggests increased scrutiny of self-employed individuals’ tax status. HMRC’s drive to use third-party data to increase automation can be expected to be used to target those who are running umbrella companies disguised as tax avoidance schemes. The consultation on strengthening HMRC’s ability to take action against those tax advisers who facilitate non-compliance from their clients also hints at increased scrutiny of those who give guidance on IR35.

Limited relief and future uncertainty

While the government highlights its commitment to economic growth and stability, the Spring Statement offers limited immediate relief for freelancers and the self-employed. The upcoming Spending Review in June and the Autumn Budget may reveal further policy changes, creating an environment of uncertainty for those working independently.

Chancellor Reeves warns that “since autumn, the world has changed.” Reeves recounts that “Europe is now facing a generational challenge to its collective security. Global economic uncertainty has increased sharply, growth has slowed in many of Britain’s major trading partners and borrowing costs have risen across most advanced economies. As an open trading economy, the UK is not immune to these challenges.”

The Spring Statement acknowledges the global economic uncertainty, with rising borrowing costs and slowed growth in major trading partners. This translates to increased fuel and energy prices, pushing the Consumer Prices Index (CPI) inflation forecast to a peak of 3.8% in July 2025. This surge in inflation will exacerbate the already challenging cost of living, placing additional pressure on freelancers, who often lack the financial safety net of traditional employment due to upfront costs, expenses and late-paying clients.

Dave Chaplin, CEO of contracting authority ContractorCalculator, shared his views following the Chancellor’s speech:

“We agree with the rhetoric in the Chancellor’s speech, but the detail is lacking. Each time the independent figures show a decline in productivity or growth, Reeves says she must go further and faster. If she doesn’t fulfil her pledge to go further and faster soon, she may find that she will simply go.”

Chaplin says he finds it “very disappointing” that the UK’s self-employed workforce did not get a mention in the speech.

He says, “The Chancellor must acknowledge that the self-employed are not merely participants in our economy—they are its lifeblood. These independent professionals represent the entrepreneurial spirit that drives innovation and growth across every sector. Yet, instead of empowering these vital contributors, we’re witnessing an alarming increase in bureaucratic hurdles that threaten to stifle their potential.”

Chaplin points out that as the backbone of UK plc, freelancers and contractors provide the flexibility and specialised expertise that larger businesses depend on to remain competitive. “Their ability to adapt quickly to market demands is precisely what our economy needs to thrive in uncertain times,” he says.

If this government is serious about economic growth, it must recognise that hampering the self-employed with excessive regulation is counterproductive. We need bold policies that liberate, not constrain, these essential economic engines. Without them firing on all cylinders, any talk of going “further and faster” remains empty rhetoric.

–Dave Chaplin, CEO Contractor Calculator