PAYE vs Self Assessment: What's the Difference?
In the UK, income tax is collected in two main ways: PAYE (Pay As You Earn) and Self Assessment. Understanding which applies to you is essential for staying compliant with HMRC and avoiding unexpected tax bills.
What is PAYE?
PAYE is the system used by employers to deduct income tax and National Insurance contributions directly from employees' wages before they are paid. If you are employed and your only income is your salary, your employer handles your tax through PAYE and you typically don't need to file a tax return.
Limited company directors who pay themselves a salary through the company's payroll are also subject to PAYE on that salary.
What is Self Assessment?
Self Assessment is the system used by HMRC to collect tax from individuals whose income is not fully taxed at source. You are responsible for reporting your income and calculating the tax you owe by completing an annual Self Assessment tax return.
Who Needs to Complete a Self Assessment Tax Return?
You will typically need to complete a Self Assessment return if you:
- Are self-employed or a sole trader with income over £1,000
- Are a director of a limited company (even if you only take a salary through PAYE)
- Have income from property (rental income)
- Have income from investments or dividends above the dividend allowance
- Have foreign income
- Have income over £100,000
- Receive Child Benefit and you or your partner earns over £60,000
PAYE and Self Assessment: Can You Have Both?
Yes — and this is common for limited company directors. If you pay yourself a salary through PAYE and also take dividends from the company, you will need to complete a Self Assessment return to declare the dividend income, even though your salary is already taxed through PAYE.
Key Deadlines for Self Assessment
- 5 October — register for Self Assessment if you're doing it for the first time
- 31 October — deadline for paper tax returns
- 31 January — deadline for online tax returns and payment of any tax owed
- 31 July — deadline for second payment on account (if applicable)
What Happens if You Miss the Deadline?
Missing the Self Assessment deadline results in an automatic £100 penalty, with further penalties accruing the longer the return remains outstanding. Interest is also charged on any unpaid tax.
Need Help Getting Your Business Set Up Correctly?
Whether you're a sole trader or a limited company director, having the right business address in place ensures HMRC correspondence reaches you promptly. Spectre Offices provides registered office addresses and director service addresses with reliable mail handling across the UK.
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