Income tax explained Income tax: how you pay it

Making a self-assessment tax return online is increasingly popular. 

Income tax is paid in two ways: monthly at source via 'pay as you earn' (PAYE), and annually (or bi-annually) after completing a self-assessment tax return.

This guide explains how both of these systems work so you can understand exactly how you pay income tax. 

Income tax and PAYE

If you work for an employer or receive income from a pension scheme, tax is usually collected under PAYE and sent directly to HMRC.

The amount deducted depends on the tax code issued by HMRC and sent to your employer or pension scheme administrator. Essentially, the code shows how much income you should receive before tax is charged. For most people, this is their personal allowance. 

Go further: Tax codes explained - find out what your tax code means in our comprehensive guide

If you work for more than one employer, you will receive a different code for each one. Pay from your main employer may use up all your personal allowance, in which case everything you earn from your second will be taxed at basic rate.      

Although those who qualify for age-related allowance, receive additional income tax free, the code their (private) pension provider receives may reflect the fact that tax is being collected on their state pension which is paid gross (without tax deducted). The correct tax on this is collected by reducing the tax-free allowance set against the private pension. 

Tax that you owe from previous years can be collected via PAYE if you have agreed this with HMRC. In these circumstances, you personal allowance will be reduced and your monthly tax bill increased accordingly.

Income tax and self-assessment

Around 10 million taxpayers complete a self-assessment tax return each year. Many of these are self-employed, but HMRC requires a wide range of individuals to submit an annual tax return, including:

  • Employees or pensioners with an annual income of £100,000 or more,
  • Those with pre-tax investment income of £10,000 or more,
  • Trustees and representatives of someone who has died,
  • Those with untaxed income – from investment, land or property, or from overseas,
  • Those who make capital gains above the annual exempt amount (£11,100 for 2016-17 and for 2015-16),
  • Those who were required to fill in a tax return last year,
  • Pensioners who get reduced age-related allowance.

Go further: Tax returns - get all the information you need on filling out a tax return

Paying self-assessment tax

Self-assessment taxpayers are normally required to make two payments in advance to HMRC, based on their total income for the previous year. One instalment is paid at the end of January and the other at the end of  July following the end of the tax year. Any under or over-payment is then made in the following January.  

You are not required to make these payments on account if the total due in the previous tax year, after tax deducted at source, was £1,000 or less, or if at least 80% of your tax due was deducted at source. You simply make a single payment by the 31 January following the end of the tax year. 

Alternatively, you can ask HMRC to collect the tax owing via your PAYE code (if you have one), providing the amount outstanding is less than £3,000.

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