PAYE vs Self-Assessment

Most employed people never think about how their tax is collected, because PAYE takes it before the money reaches them. Self-employment, company directorships, rental income, dividends and higher earnings all change that: HMRC expects you to report the income yourself and pay it in instalments to your own deadlines. Plenty of people fall into both systems at once without realising. This comparison explains how PAYE and Self Assessment work, who has to register, and the deadlines that carry automatic penalties when they are missed.

Tip: scroll the table sideways to see all columns →

Feature	PAYE	Self-Assessment
Who uses it	Employees — tax deducted automatically by employer	Self-employed; directors; those with untaxed income over £1,000; high earners (over £100,000)
When you pay	Each payday — tax deducted before you receive pay	31 January (balance due) and 31 July (payment on account)
Filing requirement	No return needed for most employees	Annual tax return (5 April year end; 31 January online deadline)
Manages multiple income sources	Only for employment income — employer notified by HMRC	Yes — rental income, dividends, capital gains, foreign income
Penalties for late filing	N/A for employees (employer penalties apply)	£100 initial penalty; further daily penalties after 3 months
National Insurance	Class 1 — deducted by employer	Class 2 (flat rate) and Class 4 (profit-based) for self-employed

You may need to do both — for example if you are employed but also have self-employment income. Register for Self-Assessment by 5 October after the relevant tax year.

Which system applies to you — and when both do

These are not alternatives you pick between. PAYE is how an employer collects tax on wages; Self Assessment is how you report income that no one has taxed at source. If you have a job and a side business, or a salary and rental income, you are in both systems and must file a return covering the untaxed part while your employer keeps deducting from your wages. HMRC will often collect small amounts owed through a change to your tax code rather than asking for a payment, which is convenient but easy to miss on a payslip.

Employed only, no other income? PAYE usually handles everything and no return is needed.
Self-employed, a company director, or receiving untaxed income above the reporting threshold? Register for Self Assessment — the registration deadline falls in the October after the tax year ends.
Started a side business this year? Register as soon as you are confident it is a business rather than a hobby, rather than waiting until January.

The expensive mistake is treating the January filing date as the moment to start thinking about tax. Penalties for late filing begin automatically and mount with time, and interest runs on late payment separately. Worse, someone who has never filed before may also have missed the registration deadline, which carries its own consequences.

Keep records as you go — invoices, receipts, bank statements, mileage. Reconstructing a year from memory is where most errors and most overpaid tax come from.

Frequently asked questions

What happens if I file my tax return late?

A fixed penalty applies as soon as the deadline passes, even if you owe no tax at all. Daily penalties start once the return is three months late, with further charges at six and twelve months, and interest runs on any unpaid tax from the due date. File the return even if you cannot pay — the two penalties are separate, and filing stops the larger one growing. You can appeal a penalty if you have a reasonable excuse, such as serious illness or a bereavement.

I cannot afford the tax bill. What can I do?

Contact HMRC before the deadline rather than after it. A Time to Pay arrangement spreads what you owe over monthly instalments, and HMRC agrees these routinely for people who engage early and can show what they can realistically afford. Interest still accrues, but the late payment penalties can be avoided. Have your figures ready — income, essential outgoings, and what you can pay each month. Ignoring the bill leads to enforcement action that is far harder and more expensive to unwind.

What are payments on account and why is my first bill so large?

Once your Self Assessment bill passes a threshold, HMRC asks you to pay towards next year's tax in advance, in two instalments due in January and July. In your first year that means paying the year just ended plus half of the next one at the same time, which is why a first bill often feels like a year and a half of tax arriving at once. Budget for it from the start. If your income has genuinely fallen, you can apply to reduce the payments on account.

Can I stop filing returns once my situation changes?

Only if you tell HMRC. A return remains due every year until HMRC formally withdraws the notice to file, so someone who closed a small business years ago can still be accruing penalties for missing returns they did not know they owed. Contact HMRC to say the source of income has ended, keep a record of the call or message, and check your online account to confirm the requirement has been removed rather than assuming silence means agreement.

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Disclaimer

The information on this page was correct at the time of writing. Amounts, thresholds, and rules may change. Always check the latest official guidance.