Why do I need a self-assessment tax return if I am taxed through PAYE ?

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As it turns out, if you earn more than £100000 (one hundred thousand pounds) from your employment (i.e. you are an employee in a company, paying taxes through PAYE every time you get paid by your employer), then HMRC requires you to also submit a self-assessment tax return every tax year.

This may sound counter-intuitive and quite confusing, which is totally understandable. However, HMRC considers that whoever makes that much money may have multiple sources of income for which taxes are owed or may have been taxed more than they should have, so HMRC owes them a refund.

In this blog we will clarify some of the most important aspects of this problem.

What happens when you earn over 100k in the UK ?

As mentioned above, if you earn than £100000 (one hundred thousand pounds) from your employment (i.e. you are an employee in a company, paying taxes through PAYE every time you get paid by your employer), then HMRC requires you to also submit a self-assessment tax return every tax year.

The first time you passed the threshold of 100k, HMRC will issue you a letter asking you to submit a self-assessment tax return. This means you will have to register with HMRC for self-assessment by the 5th of October following the tax year you had the income (I know, it’s crazy !!! why would you have to do that since you are employed and not self-employed). But registering as self-employed with HMRC simply means that you will be able to submit a self-assessment tax return. If your only source of income is the employer where you earn the 100k+ salary, then you will only declare the employed income and that’s it done.

Nevertheless, if you have more than one source of income, such as a pension in case you worked in the army, for example, or a side hustle like a business, or you receive interest or dividends from shares you owe, etc, then you will declare these on the self-assessment form you will submit.

The 5th of October deadline has to do with the fact that the tax year for self-assessment runs from the 6th of April to the 5th of April the following year.

Apart from being concerned with taxing you on all the income that you make, HMRC is asking for a self-assessment tax return also because how much you make will affect your Personal Allowance. The Personal Allowance is the amount of income each person is entitled to receive free of tax each year. The basic Personal Allowance for the tax year 2022/23 is £12570. For example, if in your employment you earn an annual gross pay of less than £12570, you will not pay any taxes except NIC (National Insurance Contribution). If you earn in your employment more than £12570, you will pay taxes on the difference (i.e. if you make £13570, you will pay taxes on the £1000 above the £12570 threshold).

However, everyone whose income is over £100000 has their Personal Allowance reduced by £1 for every £2 received over the £100,000 level until the £12,570 is diminished to 0. Once you hit the £125k threshold, your Personal Allowance will automatically be set to £0, which means that you will have to pay tax on everything you earn.

The unpleasant news is that anyone who earns between £100k and £120k can actually be paying a whopping 60% in tax. For example, if you earn £100k a year and also get a bonus of £1000, then your total income is taken to £101k. That additional £1,000 will not only be taxed at 40% but will also knock £500 off your tax free Personal Allowance. This removal of £500 from tax will be charged at another 40%, leaving you with a petty £400 from your £1000 bonus.

Will I pay tax twice if I submit a self-assessment tax return and am already paying taxes through PAYE ?

No, you will not be taxed twice. This is because taxes are calculated off the total income you make, both from employment and from other sources of income. In any case, when you submit your self-assessment tax return, you will declare on the form that you are employed making whatever the amount is of your gross pay through your employer. HMRC will anyhow easily identify you because of your NIN (National Insurance Number) and will know exactly for what employer you are working and how much tax you already paid.

But the problem that you may face is that submitting a self-assessment tax return may not be such a straightforward affair and you may run into difficulties or areas where you are unsure what to do. There are also strict deadlines for submitting a self-assessment tax return to HMRC as well as for making payments for any extra amount of tax you owe. Missing one of these deadlines may incur penalties and charges.

There is also the issue of what and how much you can claim as an expense in order to reduce the amount of tax you owe. Depending on your circumstances, you may have allowable expenses that count against the income you are taxed on. Many people don’t know what they can claim as expenses or they may fall into the trap of claiming expenses that are not allowable by HMRC.

Now might be the ideal time to engage the services of an accountant to do all the work for you and provide you with all the tax advice you need.

Don’t hesitate to get in touch for any further enquiries at: info@las-accounting.co.uk

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