Income tax - Payment methods and deadlines

Learning Outcomes

After reading this article, you will be able to identify and explain the main methods for paying income tax in England and Wales, including PAYE and self-assessment. You will understand the key deadlines for filing tax returns and making payments, recognise the consequences of missing deadlines, and apply these principles to SQE1-style scenarios.

SQE1 Syllabus

For SQE1, you are required to understand the practical operation of income tax payment systems and compliance requirements. In your revision, focus on:

• The main methods for paying income tax: PAYE and self-assessment
• When each payment method applies and who is responsible
• Key deadlines for filing tax returns and making payments
• The structure of payments on account and balancing payments
• Penalties and interest for late filing or payment
• How payment methods interact for individuals with multiple income sources

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which method is used to collect income tax from most employees in England and Wales?
2. What is the deadline for submitting an online self-assessment tax return for the tax year ending 5 April 2024?
3. When are payments on account due for self-assessment taxpayers?
4. What penalty is charged if a self-assessment tax return is filed three months late?

Introduction

Income tax in England and Wales is collected using two main methods: Pay As You Earn (PAYE) and self-assessment. Each method has specific rules, deadlines, and compliance requirements. Understanding these is essential for SQE1, as questions may test your ability to apply the correct payment method and identify the consequences of missing deadlines.

Payment Methods for Income Tax

PAYE (Pay As You Earn)

PAYE is the system used by employers to deduct income tax and National Insurance contributions from employees’ wages or salaries before payment.

Key Term: PAYE (Pay As You Earn)
A system where employers deduct income tax and National Insurance from employees’ pay at source and send it directly to HMRC.

PAYE applies to most employees and pensioners. The employer is responsible for calculating and deducting the correct amount using tax codes provided by HMRC. The deducted tax is paid to HMRC monthly or quarterly by the employer.

Self-Assessment

Self-assessment is used by individuals whose tax is not fully collected through PAYE. This includes the self-employed, company directors, partners, landlords, and those with untaxed income or complex tax affairs.

Key Term: self-assessment
A system where individuals calculate and report their own income tax liability to HMRC, usually by filing an annual tax return.

Self-assessment taxpayers must complete a tax return each year, declaring all relevant income, gains, and allowable deductions. HMRC calculates the tax due if the return is filed on paper; otherwise, the taxpayer calculates it when filing online.

When Each Method Applies

• Employees: PAYE is used for salary and wages.
• Self-employed: Self-assessment is required.
• Company directors: Usually self-assessment, unless all income is taxed at source.
• Individuals with both employment and other income (e.g., rental): PAYE for employment, self-assessment for other income.

Key Term: payments on account
Advance payments towards the next year’s income tax bill, based on the previous year’s liability, required for many self-assessment taxpayers.

Deadlines for Income Tax Returns and Payments

Tax Year

The UK tax year runs from 6 April to 5 April the following year.

Filing Deadlines

• Paper tax return: 31 October after the end of the tax year
• Online tax return: 31 January after the end of the tax year

For example, for the tax year ending 5 April 2024:

• Paper return: due by 31 October 2024
• Online return: due by 31 January 2025

Payment Deadlines

For self-assessment taxpayers, tax is usually paid in two payments on account and a balancing payment:

• First payment on account: 31 January within the tax year
• Second payment on account: 31 July after the tax year ends
• Balancing payment: 31 January after the tax year ends (with the tax return)

Payments on account are each half the previous year’s tax bill (excluding capital gains and student loan repayments). A balancing payment is made if the actual liability is higher than the payments on account.

Payments on account are not required if:

• The previous year’s tax bill was less than £1,000, or
• More than 80% of the tax was collected at source (e.g., via PAYE)

Worked Example 1.1

Question:
Sarah is self-employed and her income tax bill for 2022–23 was £4,000. How and when must she pay her income tax for 2023–24?

Answer:
Sarah must make two payments on account of £2,000 each: one by 31 January 2024 and one by 31 July 2024. If her actual 2023–24 tax bill is higher, she pays the balance by 31 January 2025.

Penalties for Missing Deadlines

Late Filing Penalties

• 1 day late: £100 fixed penalty
• 3 months late: £10 per day up to 90 days (max £900)
• 6 months late: 5% of tax due or £300 (whichever is greater)
• 12 months late: further 5% or £300 (whichever is greater)

Late Payment Penalties

• 30 days late: 5% of unpaid tax
• 6 months late: additional 5%
• 12 months late: further 5%
• Interest is also charged on late payments.

Worked Example 1.2

Question:
John files his online tax return for 2022–23 on 15 May 2024 (over three months late) and pays his £2,000 tax bill on 1 August 2024 (over six months late). What penalties will he face?

Answer:
He will pay a £100 fixed penalty for late filing, daily penalties of £10 for up to 90 days (£900), and a 5% penalty for late payment after 30 days (£100) and another 5% after six months (£100), plus interest.

Exam Warning

Missing tax deadlines leads to automatic penalties and interest. For SQE1, be able to identify the correct penalty for each stage of lateness.

Interaction of PAYE and Self-Assessment

Some individuals may have tax collected through PAYE for employment income but must also file a self-assessment return for other income (e.g., rental, dividends, or foreign income).

Worked Example 1.3

Question:
Emma is employed (PAYE) but also receives rental income. What must she do?

Answer:
Emma’s employer deducts tax via PAYE for her salary. She must register for self-assessment, declare her rental income, and pay any additional tax due by the self-assessment deadlines.

Summary Table: Key Deadlines

Key Point Checklist

This article has covered the following key knowledge points:

• PAYE is used by employers to deduct income tax at source from employees’ pay.
• Self-assessment is required for self-employed individuals and those with untaxed or complex income.
• Self-assessment deadlines: 31 October (paper), 31 January (online).
• Payments on account are due 31 January and 31 July; balancing payment is due 31 January.
• Late filing and late payment incur escalating penalties and interest.
• PAYE and self-assessment may both apply if a taxpayer has multiple income sources.

Key Terms and Concepts

• PAYE (Pay As You Earn)
• self-assessment
• payments on account