When Self-Assessment Disagrees with PAYE, Which Is Right?

Calculating the cost of a spudAround this time of year, lots of small business owners are doing their self assessment tax returns – in case you haven’t heard, the deadline is 31st January.

Often, even in simple cases with no other income, the self-assessment calculation comes out a pound or two different from the figures on the P60. In week 53 cases (which I’ll explain later) the difference can be significantly higher. The obvious question is, which is right?

The answer is that usually they are both right, but they are calculating different things.

As our FAQ explains:

  • Income tax is an annual tax based on the person’s income for a full tax year.
  • To make income tax easier to collect, the PAYE system was introduced in 1944.
  • PAYE is like paying your annual tax bill in instalments throughout the year.

The rules for calculating PAYE are an approximation to the annual income tax figure but they don’t match it exactly. Even in very simple cases, the different rounding rules usually lead to a small discrepancy at the end of the year.

If your pay frequency is weekly (or a multiple thereof) you may see a larger difference in years when you were paid on 5th April. The same is true if you were paid on 4th April in a leap year (such as 2016). This is because the PAYE rules require an extra tax allowance be given for these “week 53” payments, which is not given in the annual income tax calculation. You are effectively given an allowance by the PAYE regulations, only to have it taken away again when you do your self-assessment return.

Whether your business uses our payroll system or one of our competitors, at the end of the tax year the system produces a P60 showing the PAYE figure. If you then fill out a self-assessment return, a small difference is a normal consequence of the complicated rules we have to live by, no matter which payroll software was used to calculate your PAYE.

Steven Tucker

By Steven Tucker - Co-founder

Steven is one of the founders of The Payroll Site. He writes about things affecting small businesses, especially those things connected with payroll. He's also a Maths graduate and a Chartered IT Professional and has a few views about technology, maths and the misuse of both.