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PAYE? You may Still Need to do Self Assessment Tax Returns

PAYE vs Self Assessment

PAYE (Pay As You Earn) is the system used by the UK government to collect income tax and National Insurance contributions from employees’ pay. It is operated by employers who deduct tax and National Insurance contributions from employees’ pay before they receive it.

Employees receive a payslip that shows how much they have been paid, how much tax and National Insurance has been deducted, and any other deductions, such as pension contributions or student loan repayments.

Self Assessment tax, on the other hand, is a tax system used to collect tax from individuals who are self-employed, have rental income, or have other sources of income outside of employment.

PAYE taxpayers may be required to file a Self Assessment tax return in addition to their regular PAYE tax deductions.

While PAYE is the primary method of collecting tax in the UK, some individuals may also be required to file a Self Assessment tax return. This is typically the case if they have income from sources other than employment such as:

  • Rental income 
  • Self-employment income  
  • Income from abroad that is taxable in the UK. 
  • If an individual has certain types of tax reliefs or deductions, such as charitable donations or pension contributions, they may need to file a tax return to claim those benefits.

In some cases, an individual’s employer may deduct tax at the wrong rate, or they may have multiple sources of income that push them into a higher tax bracket, which could result in them owing additional tax that was not deducted through their PAYE.

Higher Earners

If an individual’s income is over £50K, they or their partner received child benefit, and the individual is the higher earner among the two, the individual must pay the High Income Child Benefit Charge. This tax needs to be declared through Self Assessment even if the individual is on PAYE.

Individuals who earn over £100K a year are also required to file a Self Assessment tax return in addition to their regular PAYE tax deductions. When an individual’s income exceeds £100,000, their tax-free Personal Allowance is reduced by £1 for every £2 that their income exceeds the threshold. This means that they will pay more tax than someone who earns less than £100,000. 

In these cases, it is important for individuals to file a Self Assessment tax return to report their income and claim any tax reliefs or deductions they may be entitled to. They may also need to make additional tax payments to cover the additional taxes they owe.

Filing a Self Assessment tax return allows PAYE taxpayers with additional income to report their income accurately and claim any tax reliefs or deductions they may be entitled to. It also ensures that they are paying the correct amount of tax and can help avoid any potential underpayment or overpayment issues. Failing to file a tax return when required can result in penalties and interest charges from HM Revenue and Customs. We would discuss penalties and interest in our subsequent Proceipt Newsletters.