Your 2018/19 self-assessment tax return must be filed online by midnight on 31 January 2020, if you want to avoid a filing penalty. A later deadline applies where you were not given a notice to file your return until after 31 October 2019 – in this case, the deadline is three months after the date of the notice. However, it can be beneficial to file your tax return by 30 December 2019, rather than waiting until 31 January 2020.
Filing your 2018/19 tax return online by 30 December 2019, may mean that any underpayment can be collected, through an adjustment to your tax code. This may be preferable to having to pay it in one instalment by 31 January 2020. Instead collection of the underpayment is spread throughout the following tax year. The option to have tax collected through your tax code is available where:
- Your return is filed online by 30 December 2019, or a paper return was filed by 31 October 2019;
- The underpayment is less than £3,000; and
- You, as a taxpayer, already pay tax under PAYE, for example, because you are an employee or because you receive a company pension.
However, HMRC will not collect an underpayment via an adjustment to a tax code if you, as a taxpayer, do not have sufficient PAYE income to allow for the repayment, or if as a result of coding out the underpayment, you, as a taxpayer, would pay more than 50% of your PAYE income in tax or would pay more than twice as much tax, on your PAYE income as you would do otherwise.
Where your tax return is submitted online by 30 December deadline, and the conditions for coding out an underpayment are met, HMRC will automatically adjust your tax code for 2020/21, to collect the underpayment for 2018/19. If you have just been organised in filing your tax return, ahead of time, and do not want an underpayment coded out, you must let HMRC know, by ticking the relevant box on your tax return.
The underpayment is collected by grossing it up, at your marginal tax rate, and treating it as a deduction from your personal allowances, to which you are entitled. For example, if an employee has a tax underpayment of £300 for 2018/19 relating to, say, dividend income and the taxpayer pays tax at 40%, the relevant adjustment to the tax code is £750 (£750 @ 40% = £300). Assuming the taxpayer has a personal allowance of £12,500 for 2020/21, and no other adjustments to their code, their allowances will be reduced by £750 to £11,750, giving rise to a tax code for 2020/21 of 1175L. The underpayment is collected in equal instalments, over the course of the tax year. Where the employee is paid monthly, the £300 underpayment would be collected in 12 instalments of £25. This may be much less painful than paying it all in one hit.
Consider whether it would be beneficial to file your tax return by midnight on 30 December 2019, to enable a tax underpayment to be deducted from your pay.