Do Self-Employed People Pay PAYE?

As in all countries, in the United Kingdom, all able employees must pay tax. This obligation is typically facilitated through the ‘Pay As You Earn’ (PAYE) system, which deducts a portion of wages to cover taxes.

But what about self-employed individuals who manage their own businesses? Do they play by the same rulebook? Whether you’re a self-employed startup newbie or a seasoned professional, it’s crucial to comprehend the nuances of the self-employed payslip, including whether it falls under PAYE control, and other methods of fulfilling tax obligations in the UK.”

To unravel the complexities of PAYE and streamline the process, explore the following companies providing payroll software solutions in the UK:

  1. Rippling
  2. Pento
  3. Deel

What Is PAYE?


‘Pay As You Earn’, or PAYE, is the collection system for Income Tax and National Insurance (NI) contributions by His Majesty’s Revenue and Customs (HMRC).

As Income Tax contributes to funding essential public services including the NHS, education, housing, transportation and infrastructure programs, and NI funds benefits and pensions, maternity allowances, and bereavement support, the collection of these taxes is a pivotal responsibility of the HMRC and the PAYE system.

‘Pay As You Earn’ (PAYE) serves as the collection system for Income Tax and National Insurance (NI) contributions administered by Her Majesty’s Revenue and Customs (HMRC).

Income Tax contributions finance critical public services such as the NHS, education, housing, transportation, and infrastructure programs, while NI funds benefits like pensions, maternity allowances, and bereavement support. The collection of these taxes is a pivotal responsibility of HMRC and the PAYE system.

Given the significance of these taxes in supporting infrastructure and societal well-being in the UK, it’s a legal obligation to pay them However, this is only applicable when your earnings surpass the UK tax threshold, currently set at £12,570. This threshold ensures that taxation applies only to those who can afford it.

Once you exceed the tax threshold, the amount of tax you pay depends on your earnings, a factor managed by PAYE. Companies submit their payroll to PAYE – either through external payroll software or internal processes – facilitating taxation based on earnings.

Individuals earning between £12,571 to £50,270 face a 20% tax rate, while those earning between £50,271 to £125,140 are subject to a 40% tax rate. Earnings surpassing these figures are taxed at a rate of 45%.

As for self-employment, the question arises: Can self-employed individuals register for PAYE to manage their taxes?

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Can Self-Employed Register for PAYE?


The short answer is no, self-employed individuals do not receive payments through the PAYE system.

This is because self-employed people are not entitled to the rights and responsibilities of employees, such as sick pay, maternity pay, statutory redundancy pay, and similar benefits.

As such, it’s imperative to notify HMRC when transitioning to self-employment. If uncertain about your employment status, whether employed or self-employed, it’s advisable to check with HMRC as, sometimes, HMRC might consider someone self-employed for tax purposes, even if they have a different status in employment law.

After being certain of your self-employment status with the HMRC the next question is: How are you to pay taxes if this is not done through PAYE?


How Do I Pay Tax On Self-Employed Income?


While self-employed people do not pay taxes through PAYE, they must still fulfil their tax obligations. This can be done through a self-assessment tax form which must be submitted directly to the HMRC.

The submission deadline for this form is annually on January 31st and encompasses the previous tax year from April to April.

Late payments incur interest charges and potential penalties, so it’s crucial not to miss this deadline. To navigate the form effectively, consider hiring an accountant to assist in reviewing your finances.


Can I Be Self-Employed and Employed At The Same Time?


Finally, it’s important to clarify whether one can be considered to be both employed and self-employed simultaneously as this will impact their PAYE tax obligations.

The answer is yes. You can be classified as both a self-employed individual and an employee. For example, someone may work for an employer during the day and operate their own business in the evenings.

In such cases, individuals can receive payment through the PAYE system as an employee while also submitting a self-assessment tax form for their self-employed activities. If ever uncertain about your employment status or tax obligations, it’s advisable to contact HMRC as incorrect categorisation may lead to penalty fines.