PAYE vs self-assessment — two ways tax gets paid

There are two main ways income tax reaches the tax authority, and which one applies to you shapes how much you need to think about tax at all.

The first is PAYE — Pay As You Earn. If you're an employee, this is almost certainly you. Your employer calculates the tax and National Insurance on each payslip and sends it to the tax authority automatically, before you're paid. The great advantage is that it's largely hands-off: for most employees with a single job and no other income, the right amount is handled for them and there's no tax return to file.

The second is self-assessment. This is where you're responsible for reporting your own income and paying the tax on it, usually once a year through a tax return. It applies if you're self-employed, or if you have income that isn't taxed at source — freelance earnings, rental income, significant savings interest or investment income, or high overall earnings.

Many people are a mix of both: an employed person taxed through PAYE who also does freelance work on the side will often have the employment handled automatically but need to declare the side income through self-assessment.

Why this matters for you. The biggest tax shocks happen when someone earns untaxed income — a side hustle, say — and doesn't realise they'll owe tax on it until the bill arrives. If any of your income isn't being taxed at source, setting money aside as you go is the habit that saves you.