Why do hmrc take tax in advance

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Last updated: April 8, 2026

Quick Answer: HMRC collects tax in advance primarily through the Pay As You Earn (PAYE) system for employees and Payments on Account for self-employed individuals. For PAYE, employers deduct income tax and National Insurance contributions from employees' salaries before payment, with specific rates like 20% basic rate on income between £12,571-£50,270 in 2023-24. Self-employed people make Payments on Account twice yearly (January 31 and July 31) based on previous year's tax bill, plus a balancing payment by January 31 following the tax year. This system helps ensure steady revenue flow for public services and reduces year-end tax shocks.

Key Facts

PAYE system deducts tax from employees' salaries before payment, covering income tax and National Insurance
Self-employed individuals make Payments on Account twice yearly: January 31 and July 31 each year
Basic income tax rate is 20% on earnings between £12,571-£50,270 for 2023-24 tax year
Balancing payment for self-assessment tax returns is due by January 31 following the tax year end
HMRC collected approximately £814 billion in tax revenues in 2022-23, with income tax contributing £251 billion

Overview

HM Revenue & Customs (HMRC) collects tax in advance through systems designed to ensure regular government revenue flow and prevent large year-end tax bills. The concept dates back to 1944 when the Pay As You Earn (PAYE) system was introduced during World War II to fund war efforts more efficiently. Before PAYE, employees paid taxes annually in arrears, causing financial strain. The current system operates under the Income Tax (Earnings and Pensions) Act 2003, with approximately 30 million people in the UK subject to PAYE deductions. For self-employed individuals, the Payments on Account system was formalized in the 1990s to address similar cash flow issues, requiring advance payments based on previous year's earnings. These systems help fund essential public services like the NHS, education, and infrastructure, with HMRC collecting over £800 billion annually.

How It Works

The PAYE system requires employers to calculate and deduct income tax and National Insurance contributions from employees' pay before issuing salaries. Employers use tax codes provided by HMRC, with the most common being 1257L for 2023-24, which gives a £12,570 tax-free personal allowance. Deductions occur through real-time information (RTI) submissions made each pay period. For self-employed individuals and those with other income, Payments on Account require two advance payments each year: 50% of the previous year's tax bill by January 31, and another 50% by July 31. A final balancing payment covers any remaining tax due by the following January 31. HMRC uses sophisticated algorithms to detect discrepancies, and penalties apply for late payments: immediate 5% of tax owed if 30 days late, additional 5% at 6 months, and another 5% at 12 months.

Why It Matters

Advance tax collection ensures stable government funding for critical services, with the NHS receiving approximately £180 billion annually from tax revenues. It prevents taxpayers from facing unmanageable lump-sum payments, as seen in 2022-23 when 11.7 million people submitted self-assessment returns with average payments of £3,200. The system supports economic stability by providing predictable revenue streams, crucial during crises like the COVID-19 pandemic when HMRC collected £394 billion in 2020-21 despite economic challenges. For individuals, it facilitates better financial planning, though errors can occur—HMRC reported 5.5 million tax code corrections in 2022. The system's efficiency reduces the tax gap (difference between owed and collected tax) to around 4.8% of total liabilities, ensuring fair contribution across society.