Can I Pay Self Assessment Tax Through PAYE?
Paying Self Assessment tax through your PAYE (Pay As You Earn) tax code is a convenient option for many who want to avoid making a lump sum payment. This blog will explain what PAYE is, how you can pay your Self Assessment tax through PAYE, the conditions you must meet, and the pros and cons of this method.
Table of Contents
What is PAYE?
PAYE, or Pay As You Earn, is a system used by employers to deduct Income Tax and National Insurance from employees’ salaries or pensions before they are paid. The amount deducted depends on your earnings, tax allowances, and tax code. Your tax code, a combination of numbers and letters, tells HMRC how much tax-free income you are entitled to and any allowances you are claiming.
For example, the most common tax code letter is ‘L’, indicating that you are entitled to the standard personal allowance. If your tax code is incorrect, you might end up paying too much or too little tax, so it’s crucial to ensure your tax code is right.
Paying Self Assessment Tax Through PAYE
Opting to pay your Self Assessment tax through your PAYE tax code means that instead of paying your tax bill in one lump sum, it is spread out over the year in monthly instalments. This is done automatically through your salary or pension payments. However, to be eligible for this option, you need to meet specific criteria.
Eligibility Criteria
- Tax Bill Threshold: Your tax bill must be less than £3,000. If your tax bill exceeds this amount, you cannot make a partial payment to bring it below this threshold.
- PAYE Income: You must already be paying tax through PAYE, which means you are either employed or receiving a company pension.
- Timely Submission: Your tax return must be submitted by the appropriate deadline – 31st October for paper returns or 30th December for online returns.
How It Works
When you opt to pay your Self Assessment tax through PAYE, HMRC will adjust your tax code to reflect the additional amount you owe. Your employer or pension provider will be notified of the new tax code and will deduct the extra tax from your earnings each month. This ensures that your Self Assessment tax is paid off gradually throughout the year.
If your tax bill is eligible and you choose this option on your Self Assessment form, HMRC will send you a notification and inform your employer of the new tax code, known as a P6 notice. This change might alert your employer to your additional income sources, which is something to consider if you have a side hustle you prefer to keep private.
Situations Where PAYE is Not an Option
While paying through PAYE is convenient, there are scenarios where it isn’t possible:
- High Tax Bills: If you owe £3,000 or more, you must pay the amount in a lump sum by 31st January.
- Insufficient PAYE Income: If your PAYE income is too low to cover the tax you owe.
- Excessive Deductions: If paying through PAYE would result in more than 50% of your PAYE income being deducted in tax, or if it would double the usual amount of tax you pay.
- Partial Payments: If you’ve made a partial payment to reduce your tax bill below £3,000, you still cannot use PAYE for the remaining amount.
- Class 2 National Insurance Contributions: These contributions cannot be paid through PAYE and must be settled separately.
Pros and Cons of Paying Through PAYE
There are several benefits and drawbacks to consider when deciding whether to pay your Self Assessment tax through your PAYE tax code.
Pros:
- No Lump Sum Payment: Your tax is spread over twelve months, making it easier to manage your finances.
- Automatic Deductions: Payments are made automatically, reducing the risk of missing deadlines or payments.
- Budgeting Ease: Regular, smaller payments can be easier to handle compared to a large, one-time payment.
Cons:
- Employer Awareness: Your employer will be informed of your new tax code, which might reveal additional income sources.
- Limited Eligibility: Not everyone qualifies for this payment method due to the strict criteria.
- Potential Higher Deductions: In some cases, the deductions could be significant enough to impact your monthly cash flow.
Deadlines to Remember
To take advantage of paying your Self Assessment tax through PAYE, you must meet the submission deadlines. Online tax returns must be filed by 30th December, while paper returns must be submitted by 31st October. Missing these deadlines means you will need to pay your tax bill in a lump sum by 31st January.
Conclusion
Paying your Self Assessment tax through PAYE can be a great way to manage your finances by spreading the cost over the year. However, it’s essential to ensure you meet the eligibility criteria and understand the implications, such as potential employer awareness of additional income. If you are considering this option, make sure to submit your tax return by the relevant deadline and review your tax code to avoid any unexpected issues.
Emergency Tax on Pension Lump Sums: How to Reclaim It
Took a pension lump sum and lost much of it to tax? Find out why HMRC applies emergency tax, which form to use, and how long refunds take.
Do You Pay Tax on Renting Out Your Driveway or Garage?
Renting out your driveway, garage or storage space is usually tax free up to £1,000 of gross income a year. Find out when you must tell HMRC.
Wrong Tax Code on Your Payslip? Check, Fix and Claim It Back
Think you have the wrong tax code? Learn what 1257L, BR, 0T, D0, W1, M1 and X mean, how to check your code with HMRC, and how to claim back overpaid tax.
Rent a Room Scheme and Airbnb Tax: What You Owe
The Rent a Room Scheme lets you earn £7,500 a year tax free from a lodger in your main home. Find out when it covers Airbnb income and when it does not.
Changing Accountant: How to Switch Without Missing Deadlines
Changing accountant in the UK? Learn the switching process, the documents you need, and which HMRC and Companies House deadlines are at risk during handover.
Client of the Month: Verity Vox Ltd
This month, we’re celebrating them as our Client of the Month because they’re doing something that matters: helping homes and businesses take control of their own energy.