Tax simplification is a good thing, but sometimes HMRC's moves in this direction don't necessarily make things easier for everybody, and can in fact cause quite a deal of stress. Two upcoming rule tweaks are textbook examples.
Investors with high incomes should not get too excited about the changes to the income threshold above which employees must submit a tax return. Previously set at £100,000, this increased to £150,000 for 2023-24. In theory, employees earning below this level will not need to submit a tax return by 31 January 2025 (as long as they have no other income). For the next tax year, starting in April 2024 and with a tax return deadline of 31 January 2026, the income threshold will be dropped entirely, as announced by chancellor Jeremy Hunt in last year’s Autumn Statement.
The idea of not having to file a return is certainly appealing. But the Association of Taxation Technicians (ATT) warns that it could result in people inadvertently paying the wrong amount or missing out on tax reliefs.
Higher interest rates mean you can breach the tax-free personal savings allowance with just a small amount of savings, for example. Additional-rate taxpayers have no personal savings allowance at all, and for 2023-24, the additional-rate income tax threshold dropped from £150,000 to £125,140. Employees with earnings in that range will move from a £500 personal savings allowance to none, and at the same time are no longer obliged to submit a tax return on the basis of their salary alone. It isn’t hard to see how mistakes could happen.
Investors who hold assets outside an individual savings account (Isa) or a pension also need to mind their dividends, considering the dividend tax allowance is being cut. Jon Stride, vice chair of the ATT technical steering group, explains: “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 the taxman to declare this type of additional income.”
“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,” he adds. On the other hand, they might also forget to claim tax relief for Gift Aid charity donations and for pension contributions.
Meanwhile, some self-employed workers might find themselves with a hefty tax bill for the 2023-24 tax year when they submit their next self-assessment. From April 2024, sole traders and partnerships will need to pay income tax on the profits made in the same tax year, regardless of their accounting period. To transition to the new system, for 2023-24 those with accounting periods that do not end on 31 March or 5 April will need to pay taxes for both their full accounting year and the extra period that brings them up to the end of the tax year. So a sole trader with a 31 December 2023 year-end will be taxed on profits between 1 January 2023 and 5 April 2024.
If you fall into this category, the ATT notes you can soften the blow by deducting any unused ‘overlap profits’ which were taxed twice in the early years of trade, and you may also be able to spread any extra profits over up to five years. In future, you might also want to consider changing your accounting period to make the admin easier – but this might not be the best option for the likes of seasonal businesses.
Getting an early start on any potential issues with self-assessment remains key, especially given that HMRC support is uncertain. Earlier this week it announced plans to close its self-assessment helpline between April and September, encouraging people to use online services instead, but reversed the decision 24 hours later due to outcry.
