How do I pay tax?

Updated on 13 April 2018

In this section we explain the different ways you can pay tax as an employed or self-employed person.

Do I have to tell HMRC that I have arrived in the UK?

There is no official HM Revenue & Customs (HMRC) ‘arrival form’ for you to complete, however if you want to work in the UK, whether as an employee or self-employed, then you will require a National Insurance number.

If you are employed you may need to complete a starter declaration for payroll purposes. If you are self-employed or you need to complete a tax return for any other reason, you will need to complete a form and file this with HMRC to allow them to create a self assessment record for you.

You may need to fill in a form P85 and send it to HMRC on your departure.

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How do I pay tax if I am an employee?

Your employer should take income tax and National Insurance contributions (NIC) from your wages (pay) using the Pay As You Earn (PAYE) system. Your employer then passes on the income tax and NIC to HM Revenue & Customs (HMRC). On top of your tax and NIC, your employer may pay extra employers’ NIC.

Employers in the UK must operate PAYE under the law if they have at least one employee who they pay more than a certain amount of money (£116 per week in 2018/19). PAYE should be applied to all cash earnings such as salary, overtime and bonuses. 

As well as being taxed on your cash pay, you are also taxed on most benefits that your employer provides, such as medical insurance. However PAYE may not be applied by your employer to such benefits. You may need to pay tax on them directly to HMRC at the end of the year – or you can ask for them to be included in your tax code – see below.

There is more information on how tax is collected from your wages and salary in the ‘employed section’ of this website.

If you would like information on how tax works if you have more than one job, you can see LITRG’s factsheet: Having more than one job

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What is a starter declaration?

Employers use an employee’s tax code to work out how much tax free pay they are allowed each pay period so that they can then calculate tax on the rest. When you start a job as an employee in the UK, your employer should ask you for some basic details (a starter declaration) to work out what tax code to use in the first instance. This will probably be confirmed, or more rarely, changed by HMRC in due course, once HMRC have had a chance to consider your circumstances.

There is more information about stating a job in the 'employed section' of this website.

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What is form P2 – PAYE tax code?

Once HMRC have arrived at a tax code for you, they should send you a copy of your PAYE coding notice (form P2). This should show your personal allowances for the year. As the PAYE system can also be used to collect the income tax on any other taxable income, for example untaxed benefits or give you tax relief on things like employment expenses, it might also show some amounts taken off or added on to your allowances, depending on your own situation.

You should check that the PAYE code is correct and contact HMRC if it is not, or if you do not understand it.

The 'employed section' of this website has more information on how to check a tax code at 'how do I check my coding notice?'.

If you live in Scotland, you should also read our pages on Scottish income tax and Scottish taxpayers in the ‘tax basics section’.

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Examples

These examples show how a PAYE code is calculated.

Marcus

Marcus came to the UK four years ago to work for an engineering company. For 2018/19 he has a basic personal allowance of £11,850. Marcus pays a yearly professional subscription of £140 in connection with his job, which he has told HMRC about and which he is due tax relief on. His code number will look like this:

Allowances
Personal Allowance £11,850
Subscriptions £140
Total £11,990

= Code number 1199L

The number part of Marcus's code is the £11,990 total allowances, with the last digit dropped off. The code of 1199L is shown on the coding notice which HMRC send to Marcus. His employer will also receive a copy and will know to give Marcus £999 tax free pay each month (rather than the £988 it would have been but for the professional subscription).

Jenny

Jenny came to the UK two years ago to work for a bank. For 2018/19 she receives private medical insurance worth £160, which she has told HMRC about and which she is due to pay tax on. Her code number will look like this:

Allowances

Personal Allowance £11,850
Benefit (£160)
Total £11,690

= Code number 1169L

The code of 1169L is shown on the coding notice which HMRC send to Jenny. Her employer will also receive a copy and will know to give Jenny £974 tax free pay each month (rather than the £988 it would have been without the taxable benefit).

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Understanding your payslip

Your employer must give you, as an employee, a payslip each payday. How often you get a payslip will depend on how often you are paid. It is usually weekly or monthly. 
The payslip has to show a number of things, by law. The main ones are your gross wages (the amount before anything is taken off), the income tax and NIC deducted, and your net wages (the amount you actually receive). The payslip should also show your PAYE code and National Insurance number.

You can find an example payslip at the section 'understanding your payslip'.

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Is PAYE always correct?

PAYE tax is an estimate, and is not necessarily the final amount you are required to pay. The final amount may be more or less than is collected during the year. We explain more about this in the LITRG factsheet on the PAYE tax calculation (P800) process

PAYE tax refunds most commonly arise from the following circumstances:

  • If you work less than the complete tax year
  • If you have been working on a casual basis
  • If you are a student, working in the holidays

This is because in any of these circumstances you will probably only have received part of your tax-free personal allowance under PAYE, instead of the full year’s personal allowance to which you are entitled. You may also be due a refund of tax if you have employment expenses that are eligible for tax relief but that have not been factored into your tax code.  

The sort of expenses you might be able to get relief for include:

Records and evidence must be kept of any such expenditure. You can find out more about PAYE refunds, including how to claim them, in the ‘tax basics section’ and on the GOV.UK website

Please note that under PAYE, your National Insurance deductions are unlikely to be wrong. National Insurance is due per pay period and not compared to an overall annual amount, like tax. Furthermore, you do you get National Insurance relief on self-funded employment expenses, as you may do for tax. 

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What is form P60?

If you are still working for an employer at 5 April, your employer must give you a form P60 after the end of the tax year. This shows your total pay for the year and the income tax and NIC paid under PAYE. It is important to keep the P60 safe, as it can take some time to get a replacement from your employer.

You can find more information on form P60 at 'how do I check my coding notice' in the 'employed section' of this website.

There is information on how to claim back overpaid tax on employment income in ‘other migrant issues’. 

There is more information on what to do if you pay too much tax on your employment income in the ‘employed section’.

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What is form P45?

If you are an employee and stop working for an employer, the employer should give you a form P45. This has three parts. You should keep Part 1A for your records. If you have a new job, you should give parts 2 and 3 to your new employer; if you do not have a new job but claim benefits, you should give parts 2 and 3 to the Jobcentre.

If you wish to make an in-year claim for refund of tax (for example because you have stopped working and will not be working again until the next tax year), you can find information about what to do in 'other migrant issues'. 

If you are leaving the UK, you may need to send parts 2 and 3 to HMRC You can find more information about what to do in 'other migrant issues'.

Please be aware that your ex-employer will not be able to give you a replacement P45 if you lose the original. However they should be able to provide a ‘statement of earnings’ on headed paper, which is sufficient replacement for a P45 and can be used to claim your tax refund from HMRC (although HMRC will be aware of your P45 figures, they might still ask you to send in separate proof).

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How do I claim the personal allowance as an employee?

The standard personal allowance is usually awarded to you automatically if you are an employee – it is likely to appear in your PAYE code. You have to meet residence criteria to get it – see the page on 'tax allowances' in the 'tax basics section'. Contact HMRC if you think you have not been given it but you think that you are eligible.

A non-resident who is entitled to the personal allowance but has not been given it in the PAYE code may be asked to complete form R43 to formally claim it. The form is available on the GOV.UK website.

The time limit for doing so is four years from the end of the tax year for which the claim is made. For example, allowances for the tax year 2018/19 (the year to 5 April 2019) must be claimed by 5 April 2023.

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How do I pay tax if I am self-employed?

If you arrive in the UK and intend to work for yourself you need to check that you will be self-employed. As a starting point, read the page 'am I employed, self-employed or both?', and seek further guidance as required.

If you are self-employed you are responsible for paying the correct income tax and National Insurance direct to HMRC. You do this by completing a self assessment tax return at the end of each tax year. You therefore need to register your self-employment with HMRC as soon as possible so they can set up a self assessment record for you.

You pay income tax, through the tax return, on the amount of your ‘taxable profit’ that exceeds the personal allowance – which will generally be the amount of income remaining after all business expenses have been deducted.

There is more information on how you pay tax if you are self-employed in the ‘self-employment section’.

You will pay ‘Class 2’ National Insurance at a flat rate and ‘Class 4’ contributions on profits over a certain level. There is more information on National Insurance contributions for the self-employed in the ‘self-employment section’. There is more information on how to pay Class 2 NIC on GOV.UK. (Class 2 NIC is due to be abolished from 6 April 2019.)

If you carry on with self-employed work in the UK which you used to do outside the UK, HMRC will deem that when you come to (or leave) the UK permanently a new business commences and the old one ceases.

There is more information on self-employment on the page 'working out profits, losses and capital allowances' in the 'self-employment section' of this website.

You can find out more about self assessment on the page 'Who has to complete a self assessment tax return?'

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How do I register as self-employed?

If you are self-employed, you must register as self-employed for income tax and NIC purposes with HMRC. You should do this as soon as possible from when you start to work and in any case by 5 October following the end of the tax year.

There is information on how to register in the 'self-employment section' of this website.

If you start self-employment after being unemployed and you have been claiming benefits or credits, you should also notify your Jobcentre Plus office. You may need to notify your local authority if you claim local benefits, like housing benefit.

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What information do I need for registering as self-employed?

To register as self-employed, you need the information listed below.

It is important to have all of this to hand if you are registering online as it is not possible to save the details and return at a later date once the online form has been started:

  • name, full home address (including postcode) and National Insurance number (NINO)
  • date of birth
  • contact telephone number
  • contact email address
  • the date the self-employment commenced
  • the nature of the self-employment
  • the business address (this may be the same as your home address)
  • the business telephone number (this may be the same as your personal address)

If you do not have a NINO already, go to the page ‘how do I get a National Insurance number?

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Construction Industry Scheme

If you work under the Construction Industry Scheme (CIS) you are considered self-employed and are taxable under the self assessment system. Registration under CIS is in addition to registration as self-employed for self assessment, not instead of registering as self-employed.

This means that there are two separate registrations, however both can be done at the same time. When you contact HMRC to register as self-employed you need to ensure that you are also registered as a CIS subcontractor.

Registered CIS workers receive their payments net of 20% tax. If a subcontractor is unregistered, they will receive their payment net of 30% tax.

Where tax is deducted, a refund will normally arise because of the expenses of the trade and because individuals will normally have personal allowances available. This will be reconciled through filing your self assessment tax return.

There is more information on the CIS on GOV.UK. You can find out about registering as a CIS subcontractor on GOV.UK.

You may also be interested in our information on applying for a CSCS card.

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What if I am trading through a limited (Ltd) company?

Setting up a limited (Ltd) company is very different from just being 'self-employed'.

A business which is run as a Ltd company will be owned and operated by the company itself. The company is recognised in law as having an existence which is separate from the person who formed the company and from the directors/shareholders.

A UK resident company is liable to UK corporation tax on all 'profits'. A company must file accounts to Companies House and file corporation tax returns to HMRC.

In your personal capacity, you will be a director/shareholder of the Ltd company and so may be receiving income from the company in the form of a salary and/or dividends. In the UK, you should be completing personal tax returns to declare such income and pay any income taxes.

There is information on running a limited company on GOV.UK.

If you are running a Ltd company, it is very likely that you will need some professional help with your corporate tax affairs and personal tax position. You can find a professional tax adviser on the Chartered Institute of Taxation website

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