If you run a business or side hustle, while also paying tax through PAYE (for example, because you’re employed or receiving a company pension), you may be able to pay your Self Assessment tax bill through your PAYE tax code. This isn’t for everyone, and there are specific requirements you’ll need to tick off first, so we’ll look at who qualifies, and how it works.

What is PAYE?

PAYE stands for Pay As You Earn, which is the system employers use to deduct tax and National Insurance from employees each time they pay them. The amount they need to deduct depends on how much the employee earns, any tax allowances they’re entitled to, and what tax code they’re on.

How do tax codes work?

Understanding your tax code may be confusing at first, as it’s just a series of numbers and letters. The letters usually refer to any tax allowances you’re entitled to, or whether you’re paying emergency tax (which can happen if it’s unclear what tax code you should be on, so you get ‘emergency taxed’ instead – usually paying too much tax, so speak with HMRC to get this fixed!).

The most common letter is L, which means you qualify for the normal amount of tax-free personal allowance. The numbers indicate how much tax-free you’re entitled to for that tax year.

How is my Self Assessment payment collected through PAYE?

Your Self Assessment tax return form will (normally) automatically default to the option which allows HMRC to collect the tax you owe through your tax code, but you can opt out of this by unchecking the box.

If you opt in, your employer will be notified by HMRC that your tax code has changed, and this new tax code will tell them how much to deduct from your wages each time they pay you. The deductions which HMRC tell them to make will cover what you owe after submitting your Self Assessment tax return.

 
This change to your tax code might give your employer reason to suspect that you have another source of income – which is something to consider if you don’t want them know about a side-hustle!

The tax you owe for Self Assessment will be deducted from your salary or pension in equal installments, similar to income tax or National Insurance payments. It’s spread out over twelve months, so you don’t need to pay up all at once!
 

What are the criteria for paying my tax bill through my PAYE tax code?

To pay your tax bill through your PAYE tax code, you’ll need to meet all three conditions set by HMRC:

• You owe less than £3,000 on your tax bill (if your tax bill is higher than £3,000, you can’t make a partial payment to bring it below the threshold for PAYE)
• You’re an employee or you have a company pension, so you already have a PAYE tax code that you pay tax from
• You’ve submitted your tax return either using the paper form by 31st October or your online tax return by 30th December. Learn more about Self Assessment deadlines in our guide to key dates to remember for the tax year.

When can’t I pay through my tax code?

There are some exceptions to paying your Self Assessment tax bill through your tax code:

• You don’t have enough PAYE income for HMRC to collect your tax
• You’d end up paying more than 50% of your PAYE income in tax
• It would mean you’d pay more than twice as much tax as you normally would
• You’ve made a part-payment to reduce the amount of tax you owe to less than £3,000

What are the pros and cons of paying my taxes through my tax code?

This depends on your circumstances, but some people prefer to pay through their tax code, so they don’t have to worry about paying manually. The tax will simply be collected in equal installments across the tax year (which is also great for your cash flow).

It’s worth noting that paying your tax bill this way means your tax code will change and your employer will be notified, so they’ll know you’ve submitted a Self Assessment return.

If you’ve spoken to your employer about this, it’s nothing to worry about! But it’s worth thinking about if you don’t want your employer to know about your side hustle, or if there are rules in your contract to suggest you can’t work outside of your employment.

When is the deadline to submit my Self Assessment to pay my taxes through my PAYE tax code?

If you meet all the requirements and you’re happy to pay your taxes through your tax code, you must submit your online Self Assessment by the 30th of December. If you submit paper returns, the deadline for this is the 31st of October instead!

 
Need some help completing your Self Assessment? Call us on 020 3355 4047 to learn more about our online accountancy services or get an instant quote.