Income tax - Payment methods and deadlines

Learning Outcomes

This article outlines income tax payment methods and deadlines, focusing on PAYE, self-assessment, penalties, and key compliance rules, including:

• how PAYE collection works in practice, key self-assessment triggers, and the interaction between the two systems for taxpayers with mixed income sources or changing circumstances
• detailed employer and employee responsibilities under PAYE: interpreting tax codes, complying with Real Time Information reporting, operating benefits in kind, and dealing with coding adjustments for underpayments and untaxed income
• registration, filing, and payment deadlines for self-assessment; the structure and timing of payments on account and balancing payments; and the way these dates are tested in SQE1-style scenario questions
• calculation of payments on account, including identifying the base figure, recognising when payments are not required, and evaluating when reduction claims are appropriate and the risks of excessive reductions
• the full range of penalties and interest for late filing and late payment, including fixed, daily, and staged penalties, how interest is calculated, and when a “reasonable excuse” defence may succeed
• common SQE1 edge cases such as directors with complex remuneration packages, rental income on top of employment, High Income Child Benefit Charge situations, and cases where HMRC can use simple assessment or coding out instead of self-assessment

SQE1 Syllabus

For SQE1, you are required to understand income tax payment methods and deadlines, with a focus on the following syllabus points:

• The main methods for paying income tax: PAYE and self-assessment
• When each payment method applies and who is responsible
• Registering for self-assessment (deadline and triggers) and filing methods (paper vs online)
• Key deadlines for filing tax returns and making payments
• The structure of payments on account, balancing payments, and reduction claims
• Penalties and interest for late filing or payment (staged penalties and daily penalties)
• Interaction of payment methods for individuals with multiple income sources, including coding out underpayments and simple assessment

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. PAYE deducts tax at source from employment income; self-assessment applies where tax is not fully collected at source or the taxpayer’s affairs require a return. The systems can overlap—for example where employment income is taxed under PAYE and untaxed property or dividend income is returned under self-assessment. Understanding the deadlines, how amounts are calculated, and how penalties accrue is central to compliance and to tackling SQE1-style scenarios.

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.

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.

Payment Methods for Income Tax

PAYE (Pay As You Earn)

PAYE is used by employers to deduct income tax and National Insurance contributions from employees’ wages or salaries before payment. It also typically applies to pensions.

Employers operate PAYE using tax codes issued by HMRC. The code reflects the employee’s allowances, benefits in kind, and adjustments for prior-year underpayments or untaxed income that HMRC chooses to “code out.” Employers must submit Real Time Information (RTI) reports on or before each payday and pay over the deducted tax—usually monthly, with some small employers able to pay quarterly.

Key Term: PAYE tax code (coding notice)
The alphanumeric code HMRC issues to an employer to determine the tax-free pay and deductions an employee receives via PAYE (e.g. 1257L). It can be adjusted for benefits in kind and prior-year underpayments.

Key Term: Real Time Information (RTI)
The reporting regime under which employers submit PAYE data to HMRC on or before payday, ensuring tax and NIC information is up to date throughout the tax year.

Key practical points:

• At year-end employees receive a P60 summarising pay and tax deducted; a P45 is issued on leaving employment. Benefits in kind (e.g. medical insurance, company car) are generally reported by employers, and HMRC adjusts codes or charges tax accordingly.
• HMRC may collect small additional liabilities through the tax code (“coding out”) instead of requiring a self-assessment return where appropriate.

Self-Assessment

Self-assessment is used by individuals whose tax is not fully collected through PAYE or whose circumstances require returning all sources of income and gains. Typical triggers include being self-employed, a company director, a partner in a partnership, landlords with rental profits, significant dividend or savings income above allowances, liability to capital gains tax, and the High Income Child Benefit Charge (HICBC).

Taxpayers must register for self-assessment by 5 October following the end of the relevant tax year if they have a new source of untaxed income (e.g. started self-employment). Returns can be filed online or on paper. HMRC calculates the liability if paper is used; online filers calculate during submission and receive immediate confirmations.

Key Term: balancing payment
The difference payable by 31 January after the tax year ends to settle the final liability once payments on account and tax deducted at source have been credited.

Key Term: simple assessment
HMRC’s process of issuing a formal calculation and demand for payment where tax can be calculated without the taxpayer filing a return (e.g. certain state pension or savings cases). It is an alternative to self-assessment when suitable.

When Each Method Applies

• Employees: PAYE is used for salary and wages. HMRC may adjust the tax code to collect certain underpayments or minor untaxed income. Where additional liabilities cannot be coded out or the taxpayer meets self-assessment criteria, a return is required.
• Self-employed: Self-assessment is required; tax is paid via payments on account and a balancing payment.
• Company directors: Usually self-assessment unless all income is taxed at source and HMRC can code out small residual amounts. Directors often have benefits in kind requiring code adjustments or returns.
• Individuals with employment and other income: PAYE for employment; self-assessment for other income (e.g. rental, significant dividends, foreign income, chargeable gains).
• High Income Child Benefit Charge: Those with adjusted net income over the threshold may need a self-assessment return to declare the charge even if PAYE covers all employment tax.

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.

Registration and Filing Deadlines

• Register for self-assessment: by 5 October following the end of the tax year in which the untaxed income arose.
• Paper tax return: due by 31 October after the end of the tax year.
• Online tax return: due by 31 January after the end of the tax year.

For the tax year ending 5 April 2024:

• Register for SA: by 5 October 2024
• Paper return: by 31 October 2024
• Online return: 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 or shortly after the tax return)

Payments on account are each half of the previous year’s income tax (excluding capital gains and student loan repayments). A balancing payment is made if the actual liability exceeds the payments on account and tax already deducted at source.

Payments on account are not required if:

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

Practical payment points:

• Payment methods include bank transfer (Faster Payments), online card payment, Direct Debit, or bank/building society. Ensure funds clear by the deadline; HMRC applies interest from the due date on late payments.
• Taxpayers who anticipate a lower current-year liability can claim to reduce payments on account. If underpaid, interest accrues on the shortfall. If overpaid, HMRC repays or sets the amount against other liabilities.

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 (even if no tax is due)
• 3 months late: £10 per day up to 90 days (max £900)
• 6 months late: further penalty of 5% of tax due or £300 (whichever is greater)
• 12 months late: further 5% or £300 (whichever is greater), with higher penalties possible for deliberate behaviour

Late Payment Penalties

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

Reasonable excuse can avoid or reduce penalties where the taxpayer had a genuine unforeseeable impediment (e.g. sudden serious illness), but not where the delay arises from a lack of diligence or misunderstanding of deadlines.

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. Know the stage-based filing penalties (fixed, daily, 6 months, 12 months) and the late payment penalties (30 days, 6 months, 12 months). Penalties apply even where little or no tax is due; interest runs from the original due dates. Always check whether payments on account also attract late payment penalties if missed.

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). HMRC may collect small residual liabilities by adjusting the tax code rather than requiring a return if appropriate.

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. HMRC may adjust Emma’s tax code to collect small amounts, but rental income usually requires a self-assessment return.

Worked Example 1.4

Question:
Ali’s 2022–23 self-assessment liability (after PAYE credits) was £3,600. He expects his 2023–24 profits to be much lower due to reduced trading and wants to reduce his payments on account. What can he do, and what are the consequences?

Answer:
Ali can make a claim to reduce his payments on account if he reasonably expects a lower 2023–24 liability. If he reduces them too far, interest will accrue on any shortfall. If he overpays, HMRC will repay or credit the excess. He must still pay any balancing payment by 31 January following the tax year.

Worked Example 1.5

Question:
Priya had a small underpayment for 2022–23 of £350 after PAYE. HMRC proposes collecting it through her 2024–25 tax code. Is that permissible?

Answer:
Yes. HMRC can “code out” small underpayments by adjusting Priya’s PAYE tax code so more tax is deducted through her salary. No self-assessment return is required solely for this underpayment if HMRC can collect it via coding and Priya has no other reasons to file.

Worked Example 1.6

Question:
Noah’s adjusted net income is over the HICBC threshold and his partner claimed Child Benefit. Noah has only employment income taxed under PAYE. Must he file a self-assessment return?

Answer:
Yes, typically a self-assessment return is required to declare and pay the High Income Child Benefit Charge. His PAYE does not automatically account for the charge unless HMRC has made coding adjustments and confirmed no return is needed.

Summary Table: Key Deadlines

Additional Practical Notes

• HMRC encourages online filing; it provides instant acknowledgement and faster processing. Paper returns must be filed by 31 October; late paper filers should submit online by 31 January to avoid penalties.
• Keep records sufficient to support figures on the return. Inaccuracy penalties (separate from late filing) can apply where careless or deliberate errors lead to understatements.
• Where cash flow is tight, contact HMRC as early as possible. Time To Pay arrangements are considered case by case and can prevent further penalties, though interest still accrues.
• For most employees and pensioners with minor additional liabilities, HMRC often collects via code adjustments. However, significant property income, substantial investment income, capital gains, or HICBC generally necessitate self-assessment.
• Payments on account exclude capital gains tax and student loan repayments. These items are settled via the balancing payment.

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; employers report via RTI and use tax codes to determine deductions.
• HMRC may adjust PAYE codes to collect small underpayments or account for benefits; PAYE and self-assessment can both apply where a taxpayer has multiple income sources.
• Self-assessment registration is due by 5 October following the tax year when new untaxed income arises; filing deadlines are 31 October (paper) and 31 January (online).
• Payments on account (each half the prior year’s income tax, excluding CGT and student loans) are due 31 January in the tax year and 31 July after the tax year ends.
• A balancing payment is due 31 January after the tax year ends; claims to reduce payments on account can be made if a lower liability is expected.
• Late filing penalties escalate: fixed £100, daily penalties after 3 months, further penalties at 6 and 12 months. Late payment penalties apply at 30 days, 6 months, and 12 months, with interest charged from the due date.
• The High Income Child Benefit Charge, material rental income, significant dividends or savings income, and capital gains commonly trigger the need to file a self-assessment return.

Key Terms and Concepts

• PAYE (Pay As You Earn)
• self-assessment
• payments on account
• balancing payment
• PAYE tax code (coding notice)
• Real Time Information (RTI)
• simple assessment