Will You Make A Lump Sum Tax Payment On the 31st Of January?

If you file your Self-Assessment tax return with HMRC by 30 December, you may be able to have any tax you owe for 2023/24 collected via a restriction in your tax code for the tax year commencing on 6 April 2025.   

This could avoid the necessity to make a lump-sum payment of tax on 31 January 2025 and instead allow the amounts due to be collected in monthly instalments through your salary or pension. 

There are some circumstances where this is a favourable way to pay your tax, but it doesn’t apply to everyone. 

What is a tax code?

A tax code is used by an employer or pension provider to calculate how much income tax to deduct from your gross pay. 

Different codes – what do they mean?

The most common tax code for individuals with only one source of employment or pension income is 1257L. This is because most individuals are entitled to receive a tax-free personal allowance, which has been frozen at £12,570 since 6 April 2021. 

Although 1257L is the most common tax code, depending on personal circumstances, there are several adjustments that can be included within an individual’s tax code. For example, an adjustment may be made to collect liabilities on other income which has not been taxed at source, such as benefits in kind provided by your employer or the receipt of State Pension. 

These ‘adjustments’ are denoted as both numbers and letters on a tax code and are used to determine how much tax-free income is receivable in the tax year. There are a multitude of combinations that could be included, however a few of the most common ones are: 

• For Scottish taxpayers, the letter ‘S’ is added in front of the code to indicate tax is due at the Scottish rates.   
• BR, D0 and D1 – these are most often used when an individual has more than one source of employment or pension income. BR identifies that a source of income will be taxed at the basic rate of 20%, D0 identifies that a source of income will be taxed at the higher rate of 40% and D1 means the tax deducted at source will be taxed at the additional rate of 45%. Applying the letter ‘S’ to the front of these tax codes applies the Scottish rates of tax, for example SD0 becomes the intermediate Scottish rate of 21%, SD1 becomes the Scottish higher rate of 42%, and so forth. 
• The letter T explains that your tax code requires additional calculations to work out what your personal allowance will be. 
• Code 0T means that you have no allowances available to set against that source of income, whereas the code NT means that you are not liable to pay any tax on that income. 
• The final letter which may be included is K. The letter K is added before the numbers on your tax code as it means that some other income is being added on to your pension or salary to be taxed altogether, resulting in you having negative personal allowances (i.e. where your other income exceeds your personal allowance). 

How does a tax code affect an individual in self-assessment?

If you file Self-Assessment tax returns and have a tax liability for the 2023/24 tax year which is under £3,000, then you may be eligible to have this liability collected through your tax code during the 2025/26 tax year.  However, this is only possible where: 

• You have sufficient income on the source from which the tax is to be collected (as the pension provider or employer cannot deduct more than 50% of your income in tax); and 
• Your 2023/24 Self-Assessment tax return is filed online by 30 December 2024. 

It is important to note you cannot make a part payment of tax to reduce the remaining balance to less than £3,000.  

One advantage to having tax owed collected through your tax code is that, in some cases, it can remove the requirement to make payments on account – which would be due in January and July 2025. Although it doesn’t change the amount of tax due overall, it can be beneficial from a cash flow perspective. 

For example; Tom has a salary of £75k and after completing his tax return, the tax due in January 2025 on his new rental property is £2,600. In addition to this liability, he would normally be required to make payments on account of £1,300 (each) towards his 2024/25 tax liability. The tax falling due would be £3,900 at the end of January 2025 and a further £1,300 becoming due on or before 31 July 2025. 

However, by opting to have the 2023/24 tax liability collected through a restriction in his employment tax code, he could avoid the additional lump sum payments and ensure that only £2,600 is collected in equal instalments over the 2025/26 tax year.  

If you think the above may apply to you or if you have any questions about your tax code please do not hesitate to get in contact with Blair Hay, Michael Sutherland, or a member of our Private Client Team. They are on hand to support and talk you through the process.