File your tax return by 30 December

The 2018/19 self-assessment tax return must be filed online by midnight on 31 January 2020 if a late filing penalty is to be avoided. A later deadline applies where the notice to file a return was not given 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.

Why file by 30 December?

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 the tax code is available where:

• the 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
• the taxpayer already pays tax under PAYE, for example, because they are an employee or because they receive a company pension.

However, HMRC will not collect an underpayment via an adjustment to a tax code if the taxpayer does not have sufficient PAYE income to allow for the repayment or if as a result of coding out the underpayment, the taxpayer would pay more than 50% of their PAYE income in tax or would pay more than twice as much tax on their PAYE income as they would do otherwise.

No need to tell HMRC you want an underpayment coded out

Where the tax return is submitted online by the 30 December deadline and the conditions for coding out an underpayment are met, HMRC will automatically adjust the taxpayer’s 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.

How does the adjustment work?

The underpayment is collected by grossing it up at the taxpayer’s marginal rate of tax and treating it as a deduction from the personal allowances to which the taxpayer is 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.

Action point

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.