Collecting your self-assessment tax liability via Pay As You Earn (PAYE)

If you have a tax liability or underpayment it may be possible for you to have it collected via an adjustment to your tax code, rather than making the payment in one instalment.

This means that your tax liability is no longer due by 31 January but will be collected via your income subject to PAYE.

Common underpayments we see are employment benefits such as medical benefit or company car benefits, being higher than the amount originally included in a tax code and therefore an underpayment of tax has arisen.

Requirements

For you to be eligible to have your tax liability collected via your PAYE tax code you need to meet the following requirements:

  • Your tax liability must be less than £3,000.
  • You already pay tax via PAYE, for example you’re an employee or receive a pension.
  • The tax return must be submitted online by 30 December (or by 31 October if the return is submitted in the post).

You will not be able to pay tax this way if you do not receive enough PAYE income to collect the tax; you would pay more than 50% of your PAYE income in tax or you would end up paying more than twice as much tax as you normally do.

The collection of tax

How will it work if you choose to have your tax liability collected via your tax code?

The tax collected at source on your PAYE income will increase to collect your tax liability and therefore your net pay will decrease. Typically, the underpayment will be collected from the following 6 April i.e. an underpayment assessed on the 2019/20 tax return will typically be collected via a tax code operated in the 2021/22 tax year.

HMRC have recently made changes to this collection process. From March 2020 HMRC can begin collecting a ‘tax debt’ straight away. They may contact you first but can amend the current year tax code to collect the underpayment earlier.

Why choose to collect your underpayment via PAYE?

If you meet the criteria to have your tax liability collected via your PAYE tax code, you may prefer this option from a cashflow perspective as your liability will not be due in one instalment by the due date, but will be collected via your monthly or weekly salary.

You may meet the criteria but choose not to. Some taxpayers may prefer to pay in one instalment so their net PAYE income is not reduced each week or month, or they may prefer to keep an underpayment relating to their sole trade separate to their PAYE income. Some taxpayers just like to know they have settled their liability and don’t need to think about this again until the next tax return is filed.

Contact us

If you would like to discuss this with us, please contact us at advice@taitwalker.co.uk.