PAYE vs self assessment: which applies to you?
Around 30.3 million people in the UK pay income tax through PAYE, the automatic payroll deduction system [1], while 11.48 million self assessment returns were filed with HMRC ahead of the most recent January deadline [2]. The two systems are not mutually exclusive: a significant portion of the UK workforce encounters both in the same tax year.
PAYE collects income tax and National Insurance automatically from employment earnings before the employee receives pay. Self assessment is a separate annual filing obligation that applies when someone has income HMRC cannot tax at source, or when their affairs are too complex to be settled through a tax code alone. Understanding which system applies, and when both operate simultaneously, prevents missed deadlines, avoidable penalties, and the kind of tax understatement that prompts HMRC enquiries.
Key takeaways
- PAYE is the default system for employees and pension recipients, with tax deducted automatically every payrun [3].
- Self assessment is required for self-employed income above £1,000, rental income above £1,000, and several other circumstances where tax cannot be collected at source [4].
- The online self assessment deadline is 31 January following the end of the tax year, with an automatic £100 penalty for late filing regardless of whether any tax is owed [5].
- Self-employed people pay Class 4 National Insurance at 6% on profits between £12,570 and £50,270, with 2% above that level [6].
- Being on PAYE does not exclude someone from also needing to file a self assessment return [4].
How PAYE works
PAYE is HMRC's mechanism for collecting income tax and National Insurance contributions at source from employment income [3]. The employer uses the employee's tax code to calculate deductions each payrun, subtracts them from gross pay, and transfers the amounts to HMRC alongside a Full Payment Submission. The employee receives net pay without needing to interact directly with HMRC for their employment income.
The standard tax code `1257L` gives an employee a Personal Allowance of £12,570 per year [7]. PAYE operates cumulatively: each payrun accounts for cumulative earnings and cumulative tax paid year-to-date, correcting automatically for under or overpayments as the months progress. A more detailed explanation of the mechanics, including how RTI submissions work and what employer NI the business pays on top of salary, is in the companion article how PAYE works.
How self assessment works
Self assessment requires the individual to declare their income, expenses, and any reliefs to HMRC by filing a tax return after each tax year ends [8]. HMRC uses the return to calculate the tax due or confirm a refund, rather than collecting tax continuously through payroll. The tax year runs from 6 April to 5 April.
The key self assessment deadlines are as follows [5]:
| Milestone | Deadline | What it covers |
|---|---|---|
| Register with HMRC | 5 October following the tax year | First-time registrants only |
| Paper return | 31 October following the tax year | File a paper tax return by this date |
| Online return | 31 January following the tax year | File online and pay any tax owed |
| Payment on account (1) | 31 January | First instalment of the following year's estimated tax |
| Payment on account (2) | 31 July | Second instalment of the following year's estimated tax |
Missing the 31 January online deadline triggers an automatic £100 penalty, even if no tax is owed and the return would show a refund [5]. After three months, HMRC adds £10 per day for up to 90 further days. After six months, a penalty of the greater of £300 or 5% of the tax due is applied, and the same again at 12 months.
The key differences between PAYE and self assessment
The two systems differ in who bears the administration burden, when tax is paid, and what expenses can be deducted.
| Feature | PAYE | Self assessment |
|---|---|---|
| Who calculates the tax | Employer (via payroll software) | The individual (or their accountant) |
| When tax is paid | Each payrun throughout the year | 31 January after the year-end |
| Filing obligation for the individual | None for employees | Annual tax return required |
| Deductions applied | Via tax code automatically | Declared on the return |
| National Insurance class | Class 1 (employee and employer) | Class 4 (and voluntary Class 2) |
| Business expense treatment | Narrow relief via employment expenses | Full deduction for wholly and exclusively business costs |
The expense treatment is one of the most consequential differences for anyone moving between employment and self-employment. Self-employed people can deduct costs that are wholly and exclusively for business purposes from their taxable profit, including tools, professional subscriptions, and a portion of home-working costs. PAYE employees can only claim relief on a narrower range of employment-related expenses through their tax code or a P87 form.
Who needs to file a self assessment return
HMRC requires a self assessment return in a broader range of circumstances than most people expect [4]. Self-employed sole traders with gross trading income above £1,000 in the tax year must register and file. The £1,000 threshold is a trading allowance: income below it is exempt, though registration may still be needed for voluntary National Insurance or benefit eligibility purposes [9].
Landlords with rental income above £1,000 per year must file a return and declare the income, even if they also hold a PAYE employment [10]. Rental expenses such as letting agent fees, maintenance, and mortgage interest (subject to restriction) reduce the taxable rental profit declared on the return.
PAYE employees with total income above £100,000 must file a self assessment return because the Personal Allowance tapers at a rate of £1 for every £2 of income above that level, and PAYE cannot fully account for this reduction through the tax code alone [4]. Individuals with savings income above their savings allowance, foreign income, or capital gains above the annual exempt amount are also required to file.
The High Income Child Benefit Charge applies to anyone in a household receiving Child Benefit where either partner earns above £60,000 per year [11]. It must be settled through self assessment even when all income is on PAYE. However, HMRC now offers a digital service allowing some affected individuals to pay through their tax code rather than registering for self assessment, reducing the filing obligation for those whose only reason for registering is the Child Benefit Charge [11].
National Insurance under each system
National Insurance differs significantly depending on whether income comes through PAYE employment or self-employment [6] [12].
The thresholds that determine when contributions begin and end are as follows [12]:
| Threshold | Weekly | Monthly | Annual |
|---|---|---|---|
| Secondary Threshold (employer NI starts) | £96 | £417 | £5,000 |
| Lower Earnings Limit (NI credits, no cash deduction) | £129 | £559 | £6,708 |
| Primary Threshold (employee NI starts) | £242 | £1,048 | £12,570 |
| Upper Earnings Limit (reduced rate above this) | £967 | £4,189 | £50,270 |
| NI class | Who pays | Rate for 2026-27 |
|---|---|---|
| Class 1 (employee) | Employees via payroll | 8% on earnings between £12,570 and £50,270; 2% above |
| Class 1 (employer) | Employers via payroll | 15% on earnings above £5,000 per year |
| Class 4 | Self-employed via self assessment | 6% on profits between £12,570 and £50,270; 2% above |
| Class 2 (voluntary) | Self-employed with profits under £7,105 | £3.65 per week |
Mandatory Class 2 National Insurance was abolished from April 2024. Self-employed people with profits above £7,105 now receive National Insurance credits automatically, protecting State Pension entitlement without paying a flat weekly charge [6]. Those with profits below that threshold can pay Class 2 voluntarily at £3.65 per week to maintain their contribution record.
The absence of an employer-side contribution under self-employment is a structural difference that affects both parties. A PAYE employee on £40,000 generates £5,250 in employer National Insurance paid on top of the salary. When the same individual is engaged as a self-employed contractor, that cost does not arise. Accountants advising on engagement structures should account for this asymmetry when comparing the cost of employment against self-employment rates [3].
When PAYE and self assessment apply at the same time
Employment and self-employment coexist in the same tax year more often than many people realise. A teacher who tutors privately at weekends, a software engineer who takes occasional freelance contracts, or an employee who rents out a property all face a combined position. PAYE handles the employment income; self assessment handles the rest [4].
In these cases, HMRC aggregates all income sources on the self assessment return. The PAYE element is noted, the personal allowance is applied across the total income picture, and the return calculates whether any additional tax is owed or a refund is due. The tax code may also be adjusted in response to a filed return to recover any underpayment through future PAYE deductions.
Payroll bureaux encounter this situation regularly when onboarding employees who arrive part-way through the year with self-employed income already in play. A multi-client payroll platform gives bureaux a clear view of each employee's PAYE position, which can be cross-referenced against the wider self assessment position.
Sole traders who also employ staff operate both obligations simultaneously: they file a self assessment return for their own self-employed income and run PAYE for their employees. Payroll software for sole traders that holds the HMRC Recognised status handles the employer PAYE submissions, while self assessment is typically managed separately through an accountant or accounting software.
Making Tax Digital for Income Tax Self Assessment
From 6 April 2026, self-employed people and landlords with qualifying income above £50,000 per year must operate Making Tax Digital for Income Tax Self Assessment [13]. MTD ITSA requires quarterly digital submissions of income and expense data to HMRC through compatible software, replacing the annual return for those above the threshold. From April 2027, the threshold falls to £30,000. This represents the most significant structural change to self assessment since RTI transformed PAYE in 2013.
For sole traders using HMRC-recognised payroll API for their employment income, MTD ITSA affects only the self-employed or rental side of their tax affairs, with PAYE continuing to operate as before.
Conclusion
PAYE and self assessment are complementary tax collection mechanisms, not competing systems. PAYE settles employment income quietly and automatically throughout the year. Self assessment steps in when income exists that PAYE cannot reach: self-employed profits, rental receipts, large investment returns, or earnings above the £100,000 taper.
Most UK employees encounter only PAYE throughout their working lives. Those who move into self-employment, take on rental property, or earn above certain thresholds encounter both systems simultaneously, with PAYE covering the employment portion and self assessment accounting for everything else. Understanding the boundary prevents the two most common compliance failures: a late self assessment return and a PAYE position that underestimates year-end liability.
Frequently asked questions
Does being on PAYE mean you never have to file a self assessment return?
Not necessarily. PAYE collects income tax from employment earnings automatically, but a self assessment return is still required when someone also has self-employed income above £1,000, rental income above £1,000, untaxed savings or investment income, or total employment income above £100,000. HMRC may also require a return to settle the High Income Child Benefit Charge for those earning above £60,000, unless the charge is being collected through the tax code.
What is the online self assessment filing deadline?
The online self assessment return for a given tax year must be filed by 31 January following the end of that tax year. The tax year runs from 6 April to 5 April, so the return for the year ending 5 April 2026 is due by 31 January 2027. Missing this date triggers an automatic £100 penalty regardless of whether any tax is owed, and daily penalties of £10 begin to accrue after three months of continued non-filing.
How is National Insurance different for self-employed people compared to PAYE employees?
PAYE employees pay Class 1 National Insurance at 8% on earnings between £12,570 and £50,270, with the employer paying a separate 15% on earnings above £5,000 per year. Self-employed people pay Class 4 National Insurance at 6% on profits in the same band, with no employer-side contribution. Mandatory Class 2 National Insurance was abolished from April 2024, though voluntary payments of £3.65 per week remain available for those with profits below £7,105 who wish to protect their State Pension record.
Can a sole trader who employs staff run PAYE and self assessment at the same time?
Yes. A sole trader files a self assessment return for their own self-employed income and profit, while separately operating PAYE for any employees on the payroll. The two obligations run in parallel. PAYE submissions travel to HMRC throughout the year via Full Payment Submissions, while the self assessment return is filed annually after the tax year ends. HMRC-recognised payroll software handles the PAYE element, while the self assessment return is typically prepared with an accountant.
