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.

PAYE stands for Pay As You Earn, and it’s essentially how employed people pay their Income Tax and National Insurance. Each employee has a specific tax code that indicates how much tax their employer should deduct from their wages each time they pay them – meaning you don’t have to worry about making any payments yourself!

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 things like allowances you’re claiming or whether you’re being emergency taxed (when HMRC isn’t sure how much you’re earning, so they ‘emergency tax’ you instead. In many cases this is too much tax, so always ensure you speak with HMRC to get a proper tax code). The numbers indicate how much tax-free allowance the individual is entitled to that tax year.

The most common letter is L, which means you qualify for the normal amount of tax-free personal allowance.

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 (this must be the full amount; you cannot make part payments)
• 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 either submitted your Self Assessment tax return 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.

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

The process is much easier than you think. If you meet all three conditions, HMRC will automatically collect the tax you owe through your tax code unless you’ve asked them not to on your Self Assessment tax return.

Deductions

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!

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.

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.