How tax is collected

How tax is collected

You can generally pay UK income tax in two ways – either the income tax is deducted from the income before you get the rest of the money, or you pay it direct to HM Revenue & Customs (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 to you deducts tax from your income before paying you the income due to you, it is often known as having tax ‘deducted at source’. You are most likely to come across this if you receive employment or pension income. Your employer or pension provider deducts tax at source under the Pay As You Earn (PAYE) system.

This means you only receive the ‘net’ amount of income after tax.

If you receive the full amount of your income, and no tax has been deducted from it, then you receive the ‘gross’ amount of income before tax is taken off.

When you are working out how much tax you are due to pay, you have to include the gross amount of your income. This means that if you only received the net amount, you have to add on the tax that has been deducted to reach the gross amount, and include the gross figure.

Legal requirement to notify HMRC of a tax liability

In some situations, if you are liable to income tax or capital gains tax for a tax year, you are legally required to tell HMRC. If this applies, you should usually tell HMRC by 5 October following the end of the tax year.

However, this legal requirement to notify does not apply if any of the following apply:

• HMRC have already sent you a notice to file a self assessment tax return for the tax year in question and that notice to file has not been withdrawn, or
• all of your income is taxed under pay as you earn (PAYE) and you have no chargeable gains and you are not liable to any other tax charges (such as the high income child benefit charge), or
• HMRC have sent you a simple assessment tax calculation for the tax year in question, and this correctly includes all of your income, and you have no chargeable gains and you are not liable to any other tax charges (such as the high income child benefit charge).

How to notify

If you do not fall within any of the situations noted above you must usually notify HMRC if you owe tax (this can include income tax, capital gains tax, and class 4 National Insurance contributions) for that year. This may apply to you, for example, if you started self-employment in a tax year.

How you notify HMRC of an income tax liability or non-residential capital gains tax liability depends on whether you fall within their self assessment criteria for a year. 

Self assessment cases

If you meet HMRC’s self assessment criteria, then you would usually notify HMRC by registering for self assessment. Doing this before 5 October following the end of the tax year will mean that you have met your legal requirement to notify. 

Following this, HMRC will generally issue a formal notice for you to file a tax return for that year. 

Making Tax Digital for income tax

Making Tax Digital for income tax is a new system for recording and reporting income and expenses for some people who are self-employed and/or receive property income, and for completing their annual tax return.

If Making Tax Digital applies to you, you have to:

• Use third-party software to keep digital records of your income and expenses;
• Submit quarterly updates to HMRC;
• Submit an annual tax return using Making Tax Digital software.

The way you calculate and pay your income tax is the same as for self assessment.

There is more information about who Making Tax Digital for income tax to and what you need to do if it applies to you in our Making Tax Digital for income tax hub.

Non-self assessment cases

You may have a tax liability which you need to tell HMRC about but you do not fall within HMRC’s self assessment criteria. Examples may include:

• You have savings income in excess of your personal savings allowance, but not high enough to meet the threshold for self assessment.
• You have dividend income in excess of the dividend allowance, but not high enough to meet the threshold for self assessment.
• You receive rental income in excess of the property allowance, but not high enough to meet the threshold for self assessment.

In these situations, you can notify HMRC by webchat, telephone or post. You should make a note of what, when and how you have told HMRC. HMRC will then usually try to collect the tax by adjustment to your PAYE code (if you have one), or they may issue a simple assessment.

If you have additional ‘casual’ sources of income, HMRC have a tool on GOV.UK to help you understand whether you need to tell HMRC.

More information

There is more information on the Pay As You Earn system on our page Pay As You Earn (PAYE).

There is more information about self assessment on our page Self assessment.

There is more information about simple assessment on our page Simple assessment.

There is more information about Making Tax Digital for Income Tax in our hub.