How to Spread Your Tax Bill Over 12 Months Through Your Tax Code
Have a job and a side business? If you owe less than £3,000 and file by 30 December, HMRC can collect your any tax due through your wages over 12 months instead of one January bill. Find out who qualifies, the catches and how to get ready in time.
SELF EMPLOYMENT
If you have a job and a side business, January can feel like the month everything is due at once. It does not have to be. If you owe less than £3,000 for 2025/26 and file your return online by 30 December 2026, HMRC will collect the tax through your tax code instead, a little at a time from your wages between April 2027 and March 2028. The only real price is getting your figures together and as soon as possible.
Who can pay their Self Assessment tax through their tax code?
You can pay your Self Assessment tax through your tax code if you already pay tax through PAYE, you owe less than £3,000 and you file your return online by 30 December.
Those three conditions come from HMRC's guidance, and all three have to be true:
You already pay tax through PAYE, from a job or a workplace or private pension. That is what makes this such a good fit for people with a side hustle.
You owe less than £3,000. If the bill is bigger, you cannot pay a chunk of it to bring it under the limit.
You file online by 30 December 2026 for the 2025/26 tax year. The paper deadline for this was 31 October, so online is now the only way.
Even then, HMRC can refuse. It will not use your tax code if you do not earn enough through PAYE to cover it, if it would take more than half of your PAYE income in tax, or if you would end up paying more than twice your usual tax through PAYE.
How does paying through your tax code work?
HMRC lowers your tax-free allowance for the next tax year, so your employer takes a little more tax from each payslip until the bill is cleared.
There is nothing to apply for. If you qualify and file in time, HMRC does it automatically. Your 2025/26 tax is collected through your 2027/28 tax code, which runs from 6 April 2027 to 5 April 2028. HMRC sends you a new code, and your employer gets a copy.
If you would rather clear the bill in one go on 31 January 2027, there is a box on the return to tell HMRC not to use your tax code. Tick it and you pay the normal way.
What is the catch with spreading your tax this way?
The biggest catch is that payments on account are left out, so if you have to make them, you still pay those yourself on 31 January 2027 and 31 July 2027.
A payment on account is an advance towards next year's tax. You have to make them when your Self Assessment bill is over £1,000 and less than 80% of your total tax was taken through PAYE. My guide to payments on account explains how they are worked out. Plenty of people with a job and a small side business never have to make them. Plenty do, and it is the part that catches people out.
There are three other things I would want a client to think about first:
Your payslip is smaller for a whole year. You are paying last year's bill out of 2027/28 wages, so budget for that.
Your figures have to be ready in December. Every payment in and every cost out for 6 April 2025 to 5 April 2026 needs to be added up before Christmas, not in the last week of January.
It only deals with 2025/26. The tax on what your side business is earning now still needs to be put aside as you go.
Worked examples: a side hustler with a job
Leah started selling handmade candles in 2025, and in 2025/26 her candle business made a profit of £6,000. The two examples below show the same side business alongside two different salaries. What changes between them is the share of her tax that is already taken through PAYE and how it affects making payments on account.
Example 1: Leah earns £30,000 from her job
Leah's salary already uses up her £12,570 Personal Allowance, so every pound of her £6,000 profit is taxed at 20%: £6,000 × 20% = £1,200.
Her profit from self employment is under £12,570, so there is no Class 4 National Insurance. Her 2025/26 Self Assessment bill is £1,200, which is under £3,000.
Payments on account only apply if less than 80% of your total tax was taken through PAYE, so the next step is to check that.
Leah's employer took £3,486 in tax from her salary: (£30,000 − £12,570) × 20%.
Her total tax for the year is that £3,486 plus the £1,200 on her candle profit, which comes to £4,686.
PAYE covered £3,486 of it, which is 74%. That is under 80%, so payments on account do apply. Each one is half of her £1,200 Self Assessment bill, so £600.
Filing in December brings Leah's January payment down from £1,800 to £600. The £1,200 comes out of her pay at about £100 a month from April 2027. HMRC does this by cutting her tax-free allowance by £6,000, which is the amount that produces £1,200 of tax at 20%. Her tax code goes from 1257L to 657L for 2027/28.
She still has two £600 payments on account to make herself, because those are never collected through a tax code. If she expects her candle profit to fall in 2026/27, she can ask HMRC to reduce them, but if she cuts them too far she will pay interest on the shortfall.
Example 2: Leah earns £45,000 from her job
Now imagine Leah earns £45,000 from her job, with the same £6,000 candle profit. Her total income is £51,000, which takes her £730 over the £50,270 higher rate threshold. So £5,270 of her profit is taxed at 20% (£1,054) and the last £730 at 40% (£292).
Her 2025/26 Self Assessment bill is £1,346. There is still no Class 4 National Insurance, because her profit is under £12,570.
Her bill is over £1,000, so you might expect payments on account. Check the 80% rule first. Her employer took £6,486 in tax from her salary: (£45,000 − £12,570) × 20%. Her total tax is £6,486 plus £1,346, which comes to £7,832. PAYE covered £6,486 of it, which is 82.8%. That is more than 80%, so Leah has no payments on account at all.
This is where filing early makes the biggest difference. With no payments on account, the whole £1,346 can be collected through her 2027/28 tax code, at about £112 a month. If Leah files by 30 December 2026, she has nothing to pay HMRC directly in January or July.
The 80% test is done again every year. If Leah's candle business grows, the share of her tax taken through PAYE falls, and payments on account can start in a later year even though they do not apply now.
How do I get my figures ready by 30 December?
Add up every payment you received and every business cost you paid between 6 April 2025 and 5 April 2026, then work out your profit and tax before you open the return.
Gather your records for the whole tax year: bank statements, platform reports, invoices and receipts.
Total your business income, including money that came in through PayPal or a second account, not just your main bank.
Total your business costs, and check whether the £1,000 Trading Allowance would give you a bigger deduction.
Find your 2025/26 P60 if you had a job, so you have your salary and the tax already taken.
Work out your bill and check it is under £3,000.
File online through your HMRC account, a few days before 30 December rather than on the day
If you have a job, owe less than £3,000 and can get your figures together in time, I think spreading the tax through your tax code is the better choice for most people. The one thing I would warn against is treating the money as spent.
It takes away the January lump sum, and there is no interest on what HMRC collects this way. But you need to start Keep putting tax aside from your side business as you earn it, because your 2026/27 bill is already building.
Frequently asked questions
Do I pay interest if my tax is collected through my tax code?
No. HMRC does not charge interest on tax collected through your tax code, because it is being collected on the timetable HMRC has set, not paid late.
Will my employer find out about my side business?
Your employer receives your new tax code, but not the reason for the change. A lower code only tells them to take more tax from your pay.
What can I do if I owe more than £3,000?
You pay by 31 January 2027, but if you cannot pay it all at once you can set up a payment plan with HMRC online. My write up on How to set up a payment plan with HMRC explains exactly the steps you need to follow.
Start Your Bookkeeping for Free
Not ready to buy a template yet? I have a free Google Sheets bookkeeping template you can start using today. It gives you one simple place to record your sales and your costs as they happen, so you are not rebuilding a whole year from bank statements in January. It works for online sellers, small businesses and service-based sole traders, and you only need a free Google account to use it.
Click here to Get Your Copy of my free Google Sheets Bookkeeping template
This article is for general information only and isn't tax or legal advice. Your circumstances may be different. For personalised advice, speak to a qualified accountant.
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