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’.

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.

Notifying HMRC of a tax liability

In some situations, if you are liable to income tax (including class 2 and 4 National Insurance contributions) or capital gains tax for a tax year, you need to tell HMRC. If this applies, you should usually tell HMRC by 5 October following the end of the tax year.

However, this does not apply if all of your income is taxed under pay as you earn (PAYE), you have no chargeable gains and you are not liable to certain tax charges (such as the high income child benefit charge).

In other cases, if HMRC have not already asked you to file a tax return for a year, you must usually notify HMRC if you owe tax (this can include income tax, capital gains tax, class 2 and 4 National Insurance contributions) for that year. This may apply to you, for example, if you started self-employment in a tax year.

If HMRC send you a simple assessment tax calculation for the tax year in question, and this correctly includes all of your income, then you will not normally need to notify HMRC of any liability.

  There is a separate process for reporting capital gains tax when you sell a UK residential property (or any UK land or property, if you are non-resident). You will usually need to report such disposals within 60 days using HMRC’s separate online service. You can read more about 60-day reporting for residential properties on our page Capital gains tax reporting.

How you notify HMRC of a liability depends on whether you fall within their self assessment criteria for a year. If you do, then you would usually register for self assessment. Following this, HMRC will generally issue a formal notice for you to file a tax return for that year.

However, 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 have miscellaneous income in excess of the trading 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.