How is my tax collected?
Tax can generally be collected in two ways – either taken from you before you get the rest of the money, or you pay it direct to HMRC. Sometimes it is a combination of the two – you might have some tax taken from the money before you get it and then have to pay the difference, or claim a refund, depending on your own tax situation.
If the person paying your income deducts tax from your income before paying the income due to you, it is often known as having tax ‘deducted at source’.
This means you only receive the ‘net’ amount of income after tax, rather than the ‘gross’ amount.
When you are working out how much tax you are due to pay, it is important to note that you have to include the gross amount of your income, including any tax that has been deducted from the income before you received it, rather than just the net amount.
In this section we look at how tax is collected from employment income. If you want information on how tax is collected from other types of taxable income, go to the ‘Tax essentials’ section.
This section only deals with UK-source employment income. For more information on how foreign income is taxed, go to our international students section.
HMRC ask employers to deduct tax from your wages or salary under the Pay As You Earn (‘PAYE’) system.
This applies to you whether you work for an employer full-time or part-time, permanently or temporarily, and also if you are employed on a casual basis.
Under the PAYE system HMRC use a system of codes to tell employers how much tax to deduct. The aim is to collect the correct amount of tax each time you are paid and to spread your tax allowances evenly throughout the year. This means that you get the benefit of having your tax collected evenly throughout the year, rather than having to pay it in one big lump sum. Hopefully, at the end of the year you will have paid the correct amount of tax. You do still need to check your own taxes, however, as the PAYE deduction will not always be right.
HMRC may send a notice of coding (form P2) to you, which shows the allowances that HMRC think you are due. As the PAYE system is often used to collect tax on other types of income, the form P2 also sets out any adjustments HMRC are making to collect tax on other income you may have.
Read our separate section on checking your coding notice to make sure you understand how you are being taxed. That section also tells you what to do if you do not understand your coding notice or think it is wrong.
If your employer provides you with taxable benefits, you have to pay tax on them. However, as they are often non-cash, they are not easily valued and so are not usually taxed through the payroll at the time they are provided, unlike a salary or bonus, for example.
Since 6 April 2016 there have been two ways of collecting the tax due on these benefits – by using a form P11D or by payrolling.
This is the method that was in use before 6 April 2016 and continues unless your employer opts to use the ‘payrolling’ method. If you receive taxable benefits, your employer gives you a form P11D by 6 July following the end of the tax year, for example, by 6 July 2019 for the tax year 2018/19. This summarises the value of the benefits that you have been provided with. The amount on the form P11D represents additional employment income and is taxable.
HMRC may try to collect the tax due on your taxable benefits through the PAYE system. If so, HMRC will amend your tax code to include the value of the taxable benefits. This adjustment for a taxable benefit will appear as a deduction from your allowances for the tax year.
When you are first provided with a benefit, there can be a time lag while HMRC process the relevant paperwork. For example, benefits provided to you in 2016/17 may only show up in your tax code during 2018/19. Thereafter, HMRC try to include estimated amounts in current year codes, so that they can collect the tax during the tax year in which you receive the benefit.
Dean lives in Wales and is entitled to the basic personal allowance of £11,850 for 2018/19. He has the use of a company car throughout 2018/19, and the estimated taxable car benefit is £3,110. There are no other adjustments required to Dean’s PAYE code. His 2018/19 code is:
|Total allowances and reliefs – personal allowance||11,850|
|Total deductions – value of taxable car benefit||3,110|
|Total tax free income allowed for 2018/19||8,740|
This means that Dean can only receive £8,740 of tax free income in 2018/19 through the PAYE system and his tax code is 874L. Dean will pay slightly more tax each month on his cash salary than he would have done had his tax code been 1185L – indicating the availability of the basic personal allowance of £11,850 – however at the end of the tax year when a full reconciliation (tax calculation) is performed, hopefully his tax liability on the car benefit will have been settled. If Dean did not pay more tax through PAYE, he would have to settle the tax liability on the car benefit after the end of the tax year. Note that if Dean had been a Scottish taxpayer his tax code would have had a prefix of ‘S’.
Alternatively, HMRC may ask you to complete a self assessment tax return, and you will have to pay any extra tax due on the benefits through self assessment.
Your employer must tell you if this method is being used. Your employer calculates the value of the benefit being provided to you during the whole year and then collects the tax due on that benefit through the payroll. Before 1 June following the end of the tax year, so by 1 June 2019 for the tax year 2018/19, your employer must provide you with a statement showing the benefits that have had tax collected on them through the payroll.
Steph is provided with a car by her employer during 2018/19 and the car benefit is expected to be £3,300 for the full tax year. Her employer advises both her and HMRC that they are going to payroll this benefit. Steph’s tax code should not show any restriction for the car benefit. She is entitled to the basic personal allowance and so should expect a tax code of 1185L.(Remember if Steph lived in Scotland her code would be prefixed by ‘S’) Each pay day her employer will add an amount to her salary to collect the tax due on her car benefit throughout the year. Steph is paid monthly so each month her employer will add £275 (£3,300 divided by 12) to the value of her cash salary before calculating the tax she has to pay that month. Note that Steph does not receive £275 per month extra in her pay, but she pays tax as if she had been paid an extra amount. That means that at the end of the tax year Steph will have paid tax on £3,300 in addition to the tax due on her salary and so will have paid the tax due on her car benefit through her payroll.
Your employer may not payroll all of your benefits so you may also receive a P11D for some of them.
It is possible to be both employed and self-employed at the same time.
You pay tax on your employment and self-employment income in different ways. The total tax you pay is based on your total combined income.
You pay tax on your employment income through PAYE.
You pay tax on your self-employment profits under the self assessment system. You must also include your employment income and any other income that you have on your self assessment tax return, not just the self-employment income.
If you want information on how tax is collected from other types of taxable income, go to the ‘Tax essentials’ section.
You can find more information on the PAYE system on the GOV.UK website.
You can find more information on the inclusion of taxable benefits in your tax code on the GOV.UK website.