Rule change could mean people pay the wrong amount of tax

The rule change, announced¹ at yesterday’s Autumn Statement, will save an estimated 338,000 people from having to file a tax return for the tax year starting in April 2024, and expands on a previous change² exempting those earning less than £150,000.

The ATT had warned³ that the previous rule change could lead to some individuals who earn up to £150,000 inadvertently paying the wrong amount of tax, with the latest announcement expanding that risk to lower earners.

Jon Stride, vice chair of the ATT Technical Steering Group, said:

“Filing a tax return, whether you submit it yourself or have an accountant do it for you, acts as a way of checking you’ve paid the right amount of tax in a year.

“In a time of high interest rates, plenty of employees could find themselves with tax to pay on their savings⁴. At current interest rates, savings of £10,000 which aren’t held in an ISA could easily give rise to a tax liability for a higher rate taxpayer. While banks report interest income to HMRC, we doubt the system is infallible given how many taxpayers and savings accounts it has to match up.

“In addition, from April, if you have dividend income of more than £500 you will have tax to pay on that income if you’re an employee earning more than the personal allowance. Holding a few shares here and there is not unusual, and dividend information is not readily available to HMRC, so taxpayers will need to remember to contact HMRC to declare this type of additional income and arrange to pay tax on it.

“If they don’t have to file a tax return, taxpayers may easily forget to tell HMRC about interest and dividend income and inadvertently underpay tax. This could lead to interest charges and penalties if they are late in getting their tax positions up to date, or if HMRC find that they haven’t declared income.”

As well as the risk of underpayment, the latest change could mean taxpayers miss out on valuable tax reliefs and is likely to pile further pressures on HMRC’s already struggling customer service teams.

Jon Stride continued:

“Today’s announcement will mean thousands of higher and additional rate taxpayers will be removed from Self-Assessment. Filing a tax return is often the easiest way for these individuals to claim tax relief for Gift Aid payments to charities, and for any private pension contributions.

“While you don’t have to be in Self-Assessment to claim these types of tax relief, the alternative ways of doing so are often more complicated and cumbersome than filing a Self-Assessment return.

“Given most tax returns are submitted electronically and should be processed automatically by HMRC, we question the merits of removing so many taxpayers from Self-Assessment. At best, they will be forced to contact HMRC to declare odd bits of untaxed income, or to claim tax reliefs. At worst, they may miss out on tax savings they’re entitled to, or forget to declare income and end up paying penalties to HMRC.

“As was the case with the rule change on Self-Assessment announced in June, there was no consultation of these proposals. We worry the changes may have been introduced primarily as a cost saving measure without consideration of the wider impacts.”

Notes for editors:

1. Autumn Statement 2023: Creating a simpler, more effective tax system.

2. In June it was announced that employees with no income other than from employment would only need to file tax returns if they earned more than £150,000.  Today’s announcement expands that decision to all employees, regardless of their level of earnings.

3. ATT press release: HMRC change means some high-earners won’t pay the right amount of tax.

4. Basic rate taxpayers (with income up to £50,270) have a Personal Savings Allowance (PSA) of £1000, meaning savings interest up to that amount is taxed at 0%. For higher rate taxpayers, the PSA is £500. Additional rate taxpayers (income over £125,140) do not benefit from a PSA. At that level, the amount of tax-free personal allowance you’re entitled to also starts to be reduced, so by the time your income reaches £125,140, you don’t get any personal allowance at all.