Self Assessment is often associated with the self-employed, but many individuals who earn income outside of their primary employment are also required to complete a tax return each year. This might include professionals with freelance work, landlords with rental income, or those receiving untaxed income. Navigating the process can be overwhelming, especially when it comes time to make the final payment to HMRC.
One of the lesser-known conveniences available to some taxpayers is the option to pay their Self Assessment tax bill through their PAYE tax code. This process can simplify tax obligations significantly, but not everyone qualifies, and there are rules and deadlines you must be aware of. This article explores how PAYE can be used for Self Assessment tax payments, who is eligible, and the key benefits and limitations of this approach.
What Is PAYE?
PAYE, or Pay As You Earn, is the system used by HMRC to collect income tax and National Insurance contributions from employees and pensioners. Under PAYE, tax is deducted from your salary or pension before you receive it, based on your tax code, and passed on to HMRC by your employer or pension provider.
Your tax code is adjusted to reflect your personal allowance, tax bands, and any deductions or additions HMRC deems necessary. It is possible to amend this tax code to include an underpayment from a Self Assessment return, allowing the amount owed to be collected gradually over the next tax year.
How Does Self Assessment Work?
Self Assessment is the system HMRC uses to collect income tax from individuals whose tax isn’t automatically deducted. This usually applies to those with income from self-employment, property, dividends, or other sources that aren’t fully taxed at source.
Each year, taxpayers must complete a Self Assessment tax return declaring all relevant income and any expenses or reliefs. HMRC then calculates the total amount of tax owed. The deadline for filing paper tax returns is 31 October, while online submissions must be completed by 31 January of the following year. However, if you wish to pay through your PAYE tax code, your online submission must be completed earlier, by 30 December.
Who Is Eligible to Pay Self Assessment Tax via PAYE?
Not everyone can use their PAYE code to pay their Self Assessment bill. HMRC sets out three specific conditions that must be met:
Tax Owed Must Be Less Than £3,000
To qualify for PAYE collection, the total amount you owe to HMRC from your Self Assessment must be less than £3,000. If the amount is £3,000 or more, you must make alternative arrangements to settle your bill.
You Must Be Part of the PAYE System
You must already be paying tax through PAYE, either as an employee or as someone receiving a workplace or private pension. This ensures there is a steady income from which HMRC can collect additional tax.
You Must File Your Return on Time
To be eligible for PAYE collection, you must file your tax return by 31 October if submitting a paper return or by 30 December if filing online. Filing after these dates disqualifies you from having the payment collected through your PAYE code.
How PAYE Tax Collection Works for Self Assessment
If you meet all the eligibility criteria and opt for tax collection via PAYE on your tax return, HMRC will adjust your tax code in the new tax year to include the amount owed. The additional tax is then deducted in equal installments over the course of the following tax year.
For example, if your Self Assessment shows that you owe £1,200, HMRC will divide this amount over twelve months, deducting £100 extra per month in addition to your standard PAYE deductions. These changes usually take effect from April.
The 50 Percent Rule
It is important to note that HMRC will not allow PAYE tax code deductions that result in more than 50 percent of your income being taken as tax. This is known as the 50 percent rule.
For instance, if you earn £4,000 annually from a part-time role and owe £2,500, HMRC will only be able to deduct £2,000 through PAYE (50 percent of £4,000). Since your liability exceeds this threshold, you would not qualify to pay your tax through PAYE in this scenario.
Benefits of Paying Self Assessment via PAYE
There are several reasons why taxpayers may opt to pay their Self Assessment tax bill through their PAYE code.
Streamlined Payment Process
Once set up, payments are made automatically each month. There is no need to make manual bank transfers or worry about missing a payment deadline. Everything is managed through your tax code.
Better Cash Flow Management
Spreading the cost of your tax bill over twelve months can help make the amount more manageable, especially compared to paying in one large lump sum. This can be particularly useful for those with fluctuating income or tight monthly budgets.
Reduced Risk of Late Payment Penalties
When you opt for PAYE collection and everything is in order, you’re less likely to miss a payment deadline. This can help avoid interest charges and penalties for late payment.
Peace of Mind
Many people appreciate knowing that their tax is being handled by HMRC automatically. This reduces the likelihood of miscalculations or missed payments and can simplify personal financial planning.
Limitations and Exclusions
While there are clear benefits, it’s equally important to understand the limitations of using PAYE to pay your Self Assessment tax bill.
Not All Tax Types Are Covered
If you are self-employed, your Class 2 National Insurance contributions cannot be collected via PAYE. These must be paid separately, even if you meet all the other criteria for PAYE collection.
Payments Start in the Following Tax Year
Although your liability is calculated based on the income from the current tax year, any collection through PAYE begins in April of the next tax year. This means you need to manage your cash flow for the current year accordingly, especially if you are close to the £3,000 limit.
Impact on Your Monthly Income
Because the amount owed is added to your regular tax deductions, you will see a reduction in your monthly take-home pay. For some individuals, especially those on lower incomes, this could present a budgeting challenge.
No Flexibility Once Set
Once HMRC adjusts your tax code, the payment plan is fixed for the year. If your circumstances change, for example due to a reduction in income or a change in employment, it may become necessary to contact HMRC to discuss alternative arrangements.
Submitting Your Self Assessment Correctly
Ensuring your Self Assessment is submitted accurately and on time is crucial to take advantage of PAYE payment collection. Make sure all sources of income are included, and double-check your figures before submitting.
When completing the return, look for the option asking whether you would like any underpaid tax collected through PAYE. Selecting this option tells HMRC you would prefer automatic deductions.
Filing early also increases the chances that HMRC can process your return and amend your tax code in time for the new tax year. Delays in submission could result in HMRC missing the opportunity to update your code, forcing you to pay your bill in a lump sum.
Monitoring Your Tax Code and Payslips
Once your tax code has been adjusted, it’s wise to review your payslips to ensure that the additional deductions are being made as expected. This will confirm that HMRC has successfully processed your request and that your payments are on track.
If you notice discrepancies or if the deductions don’t begin when expected, it’s important to contact HMRC promptly to resolve the issue.
Record Keeping and Documentation
Keeping thorough records of your income, expenses, and correspondence with HMRC will support your claim and ensure your Self Assessment is accurate. You should retain copies of all tax returns, PAYE coding notices, and payment confirmations for at least six years in case HMRC requests further information.
Setting Up PAYE Collection for Self Assessment: Step-by-Step Guide
Paying your Self Assessment tax bill through your PAYE tax code can be a highly convenient solution, particularly if you earn additional income but are primarily taxed under PAYE. We explored eligibility, benefits, and key limitations of this method. Now, we move into the practical aspects: how to actually set up a PAYE-based collection for your Self Assessment bill.
This guide covers the step-by-step process of preparing your Self Assessment return, selecting PAYE collection, checking your tax code adjustments, and ensuring everything is in order to avoid delays or errors.
Filing Your Self Assessment Return Accurately
The process begins with completing your Self Assessment tax return correctly and ensuring that all relevant information is included.
Gather All Relevant Income Information
Before starting your return, collect documentation of all your taxable income for the year. This may include:
- Employment income (P60, P45, or payslips)
- Pension income (P60 or pension provider statements)
- Self-employment or freelance income
- Rental income
- Investment and savings interest
- Dividends and other untaxed income
The accuracy of your return depends on the completeness of this information. Missing even a small source of income could result in underpayment and complications down the line.
Include Allowable Expenses and Reliefs
If you have income that permits deductions, such as self-employment or property income, include all allowable business expenses and reliefs. This helps reduce your taxable income and ensures that you don’t overpay.
Declare All Income on the Correct Pages
Each income source has a designated section on the Self Assessment form. Ensure that:
- Employment income is entered on the Employment page
- Self-employed earnings go under the Self-employment section
- Property income is declared in the UK property section
- Other sources, such as dividends and bank interest, are recorded accurately in the Additional income sections
Mistakes in these areas could delay your return being processed, which may disqualify you from paying via PAYE.
Selecting PAYE Collection on the Tax Return
Once all income and deductions have been declared, you’ll reach a section within the Self Assessment return that gives you the option to have any underpaid tax collected through your PAYE tax code.
Locating the PAYE Collection Option
Within the ‘Tailor your return’ or ‘Additional information’ section, you’ll find a prompt asking whether you would like HMRC to collect any owed tax through your PAYE code. You must:
- Answer yes to this question
- Ensure the tax owed is under £3,000
- Submit your return by the 30 December online deadline or 31 October for paper returns
Timing Matters
Submitting your return early not only provides peace of mind, but it also allows HMRC time to process the request and make the necessary changes to your tax code before the new tax year begins in April.
Delays in submission, especially beyond the deadline, mean you will not qualify for PAYE collection and will need to make other arrangements to pay your bill.
Receiving and Understanding Your PAYE Coding Notice
Once HMRC has processed your Self Assessment return and approved the PAYE collection method, you will receive a PAYE coding notice.
What is a PAYE Coding Notice?
A PAYE coding notice, also known as a P2 notice, outlines how your tax code has been calculated. This will reflect any underpaid tax from your Self Assessment return that is to be collected over the next tax year.
How to Interpret the Notice
The notice includes:
- Your new tax code
- A breakdown of allowances and deductions
- The amount of tax to be collected
- How it has been spread across the year
For example, if you owe £1,200, your tax code will be adjusted so that an additional £100 is deducted each month over 12 months.
Check for Accuracy
It is crucial to review this notice for errors. Make sure:
- The amount owed matches your return
- The deductions align with your income
- There are no unexpected adjustments
If anything appears incorrect, contact HMRC immediately to rectify the issue.
Monitoring Monthly Payslips for Deductions
Once your tax code has been updated, deductions will begin automatically through your salary or pension payments.
Confirm That Deductions Have Started
From April onward, check your monthly payslips or pension statements to confirm that the extra tax is being deducted. This confirms that HMRC has successfully set up your PAYE collection.
Keep Track of Monthly Payments
Keeping a record of the deductions will help you ensure that the full amount is collected by the end of the tax year. If deductions fall short or are missed, you may still have a balance to pay at the end of the period.
Managing PAYE Collection Mid-Year
Occasionally, circumstances may change during the tax year that affect your ability to continue with PAYE collection.
Changes in Employment
If you change jobs or leave employment, your PAYE code may no longer apply, particularly if your new income isn’t eligible for PAYE deductions. In such cases:
- Inform HMRC immediately
- Arrange to pay the remaining balance via other methods
Reductions in Income
If your income decreases significantly, the 50 percent rule may come into play. HMRC will stop deductions that exceed 50 percent of your earnings, and you’ll be required to settle the remaining balance separately.
Contacting HMRC for Adjustments
In any of these situations, proactive communication with HMRC is essential. They can advise you on:
- Adjusting your payment method
- Issuing a revised tax code
- Setting up a new payment plan for the remaining balance
Alternative Payment Methods If PAYE Isn’t an Option
If you are not eligible for PAYE collection, or if it becomes unfeasible partway through the year, you’ll need to consider alternative ways to pay your Self Assessment bill.
Direct Bank Payment
This is the most straightforward method. Payments can be made via:
- Bank transfer (Faster Payments, BACS, or CHAPS)
- Debit card through HMRC’s online portal
Budget Payment Plan
HMRC offers a Budget Payment Plan, allowing you to set up weekly or monthly payments by Direct Debit to spread the cost of your next Self Assessment bill.
Time to Pay Arrangement
If you are struggling financially and cannot pay in full, you may be eligible for a Time to Pay arrangement. This allows you to spread payments over a longer period, though interest may be charged.
Implications for Future Tax Years
Opting for PAYE collection this year does not automatically apply it to future years. You must:
- File your return on time each year
- Select the PAYE option every time
Review your financial situation annually to determine if PAYE collection remains the best choice for you. Changes in income sources or amounts may alter your eligibility.
Record-Keeping and Documentation Best Practices
Proper documentation is vital when using PAYE to pay your Self Assessment tax bill. This includes:
- Copies of your tax return and confirmation of submission
- PAYE coding notices from HMRC
- Monthly payslips showing additional deductions
- Any correspondence with HMRC
Retaining these records for at least six years is advisable. They may be needed for audits, queries, or if discrepancies arise in your tax history.
Software Support and Digital Tools
Digital tools can be immensely helpful in managing Self Assessment and PAYE processes. They can:
- Track income across multiple sources
- Calculate tax liabilities accurately
- Submit returns directly to HMRC
- Notify you of deadlines and updates
Using an HMRC-recognised software solution can streamline your filing process, minimize errors, and ensure that your request for PAYE collection is submitted correctly and promptly.
Real-World Applications of PAYE Collection for Self Assessment
We’ll explore real-world scenarios where individuals have opted to pay their Self Assessment tax bills through their PAYE tax code. Understanding how this system works in practice can provide useful insight for those considering this payment method. By examining how different earners—from salaried employees with side gigs to pensioners with investment income—navigate the PAYE option, you’ll get a more grounded understanding of both its practical benefits and the challenges that may arise.
These case-based examples illustrate the kinds of circumstances in which PAYE collection makes financial and administrative sense, how to troubleshoot common issues, and how to ensure long-term compliance with HMRC regulations.
Case Study 1: The Full-Time Employee with Freelance Income
Background
Amir works full-time as a marketing manager and receives his main income through PAYE. In addition to his salaried position, he freelances occasionally for clients in the creative sector. His freelance earnings typically amount to £2,000 to £3,000 per year.
Applying for PAYE Collection
After filing his Self Assessment tax return online by the 30 December deadline, Amir chose the option to have the underpaid tax collected through his tax code. His liability for the freelance income amounted to £750, which was well under the £3,000 threshold.
Outcome
HMRC adjusted his tax code for the new financial year, and the additional amount was spread across 12 monthly payslips. Amir appreciated the simplicity and automation, as it allowed him to avoid lump sum payments and better manage his budget.
Key Takeaway
For employees with modest freelance income, using PAYE for Self Assessment bills can be a seamless and low-effort solution that avoids large, one-off tax payments.
Case Study 2: The Part-Time Worker with Rental Income
Background
Sophie works part-time at a local charity and earns £6,000 per year. She also rents out a flat, generating an annual rental income of £9,500. After allowable expenses, her taxable profit from the property comes to £5,000, generating a tax liability of £1,000.
PAYE Limitations
Although her tax liability is below £3,000 and she submitted her return on time, Sophie encountered a problem. The 50 percent rule applied: collecting £1,000 through her PAYE income would exceed 50 percent of her part-time salary.
Resolution
Sophie contacted HMRC and arranged to pay her Self Assessment bill manually through bank transfer. In future years, she plans to increase her regular PAYE income so that she can qualify for the PAYE option again.
Key Takeaway
Even if the tax liability is small, the PAYE collection option may be unavailable if your employment income is too low to accommodate deductions under HMRC’s 50 percent rule.
Case Study 3: The Retiree with Investment Income
Background
Peter is a retired schoolteacher who receives a company pension taxed under PAYE. He also has dividend and interest income from various investments totaling £7,000 annually, leading to an additional tax bill of £1,200.
Choosing PAYE Collection
Peter submitted his Self Assessment return online before the 30 December deadline and requested PAYE collection. Because he receives a regular, taxed pension income and his liability was below £3,000, he met all the criteria.
Outcome
His pension provider implemented the new tax code, and the additional tax was collected gradually over the year. Peter found this method helpful for managing his retirement budget.
Key Takeaway
Pensioners receiving taxable company pensions can also benefit from the PAYE method, providing a stress-free way to manage tax liabilities from investments or other side income.
Case Study 4: The Employee with Irregular Bonuses
Background
Ella works as a sales executive and receives a base salary plus performance-related bonuses. Her income varies significantly throughout the year. She also earns small sums from public speaking engagements, which total around £1,500 per year.
Submission Challenges
Ella submitted her return online and opted for the PAYE collection. However, due to irregular income, her employer had to frequently update payroll systems to reflect the new coding, and this caused inconsistencies in how the deductions were applied.
Resolution
After several discrepancies, she contacted HMRC to revise the arrangement and opted to pay the outstanding amount in a lump sum. Going forward, she now sets aside money monthly and only uses PAYE collection when her income is predictable.
Key Takeaway
For those with variable income or inconsistent bonuses, PAYE collection may create complications with payroll deductions. Manual payment could be a more stable alternative in such cases.
Case Study 5: The Dual-Income Household with Varying PAYE Eligibility
Background
James and Olivia are a married couple. James works full-time and receives PAYE income. Olivia is self-employed and earns around £10,000 annually. Olivia also receives dividends from shares held in her name.
Tax Responsibilities
While James had the option to collect unpaid tax through PAYE, Olivia did not because her income wasn’t taxed at source. James’s tax return reflected £2,000 in untaxed interest, while Olivia reported £1,300 from dividends.
Mixed Outcome
James was able to use PAYE collection, while Olivia needed to pay her liability manually. This distinction highlighted the importance of income source when determining PAYE eligibility.
Key Takeaway
Only those with existing PAYE income—whether from employment or pensions—can use PAYE collection. In mixed-income households, different strategies may be necessary.
Challenges Taxpayers May Face
While the examples above show how the PAYE method can work well in many situations, it’s important to also consider the potential difficulties taxpayers may encounter.
Miscommunication with Employers
In some cases, employers may not promptly implement the revised tax code provided by HMRC. This can result in under-collection or over-deduction.
To avoid this:
- Verify updated payslips starting in April
- Maintain clear communication with your employer’s payroll department
- Follow up with HMRC if discrepancies arise
Mid-Year Employment Changes
If you switch jobs mid-year or start a second job, your tax code may become invalid or require re-adjustment.
You’ll need to:
- Notify HMRC of the employment change
- Check whether the PAYE collection remains valid under your new income level
Unexpected Tax Bills
Sometimes, despite selecting PAYE collection, the full amount may not be deducted by year-end. This often happens when income fluctuates, or the deductions fall below the projected amount.
To manage this:
- Regularly monitor your payslips
- Use online tools or tax software to forecast your year-end position
- Consider setting aside savings just in case
Ensuring Compliance and Financial Planning
The most effective way to manage PAYE collection is through proactive planning.
Keep Your Records Updated
Make sure that all your income and personal information held by HMRC is accurate. This includes:
- Job changes
- Additional income streams
- Marriage or name changes
Submit Returns Early
Early submission gives HMRC time to process your request and avoids delays in adjusting your tax code.
Monitor Tax Code Notices
Always review your P2 tax coding notices for any unexpected changes or deductions. If something looks off, don’t hesitate to contact HMRC.
Learning from Others
These case studies underscore a few universal truths:
- Timely submission and accurate reporting are essential
- PAYE collection works best for consistent PAYE income
- Proactive communication with HMRC and employers reduces errors
Whether you are just beginning to explore this payment method or have used it in previous years, understanding these real-life applications and their outcomes can help you make more informed decisions about your tax management strategy.
In all cases, it’s about choosing the method that fits your financial habits, income types, and overall goals best.
Conclusion
Navigating the UK’s Self Assessment tax system can be daunting, especially for those juggling multiple income streams beyond traditional employment. However, for eligible individuals, the option to pay your Self Assessment tax bill through your PAYE tax code offers a streamlined and practical solution. Over the course of this series, we’ve explored the fundamentals of how the PAYE collection method works, who qualifies, the key benefits it offers, and the limitations that may apply.
We’ve seen that to use this method, your tax liability must be under £3,000, you must already be paying tax through PAYE, and you must file your return on time. When these conditions are met, HMRC can adjust your tax code to collect the amount owed gradually across the year. This offers clear advantages in terms of convenience, predictability, and peace of mind, especially when compared to making large, lump-sum payments.
Real-world examples show that this method works best for individuals with stable PAYE income, such as full-time employees or pensioners, and can even accommodate those with modest side income from freelance work, investments, or property. However, there are scenarios where the system becomes less effective, such as when income is highly irregular, when multiple jobs complicate payroll deductions, or when earnings are too low to meet the 50 percent rule.
To make the most of this payment option, taxpayers must be proactive. That includes submitting returns early, keeping personal and employment records up to date, reviewing tax code notices, and communicating with both employers and HMRC as needed. Ultimately, choosing to pay your Self Assessment tax bill through PAYE is not only about convenience, it’s about creating a more manageable and compliant financial future.
This method may not suit everyone, but for those who qualify and prefer a hands-off approach to tax payments, it can offer substantial relief and clarity. By understanding both the mechanics and the practical applications of PAYE collection, you can make better-informed decisions and take control of your personal tax strategy with greater confidence.