On 6 April 2016, a monumental change to investment income occurred and the ramifications of it are now coming home.
From the beginning of the 2016/17 tax year, HMRC changed how investment income consisting of dividends and bank/building society interest is taxed, with the withdrawal of tax credit and withholding tax deductions on anything paid.
Coupled with the introduction of the savings and dividend allowances, the change was billed as a cost saving measure for HMRC as it removed the need for lots of people to file an annual Tax Return (Self-Assessment or repayment form R40). The targeted groups were those who usually filed in order either to reclaim or pay relatively small amounts of income tax each year. However, there are always side effects to any action and whilst many thousands of individuals are no longer required to file Tax Returns for relatively small adjustments to their tax position, there is another group of people who now suddenly find themselves having income tax liabilities where previously they had none.
Equally, these same people now may have an obligation to file an annual Tax Return to declare their liabilities and they may be completely unaware of their legal obligations.
For example, excluding ISAs, Mrs Jones has for years had taxable State and private pensions totalling £16,000 per annum, bank interest (taxed at source) of £2,500 (gross) and dividend income of £11,500. Until 5 April 2016, as her pensions are handled through PAYE and her bank interest and dividends suffered tax at source (or received an appropriate tax credit), her affairs were simple as she was a basic rate taxpayer, and she had no need to have contact with HMRC.
However, from April 2016, the taxation on Mrs Jones’ investment income changed. For 2016/17, whilst the gross level of her income is unchanged, her investment income exceeds the savings and dividend allowances, so without basic rate tax deducted at source, Mrs Jones now has to file a Tax Return and settle the income tax due on her bank interest and dividends direct with the Collector Taxes (in this example £300.00 on her bank interest and £487.50 on her dividend income).
To file a Tax Return under Self-Assessment, Mrs Jones will have until 5 October 2017 to notify HMRC that she is required to file a Tax Return as she has liabilities to pay. The usual filing deadlines are 31 October for paper Returns and 31 January for electronic filing (although in some cases, HMRC can extend when Tax Returns are issued by them later than normal). The tax is due on 31 January 2018 for liabilities arising 2016/17.
Although HMRC computers are now routinely notified by banks and building societies as to how much interest is paid on an individual’s behalf (and from an interest point of view, in theory HMRC should therefore already have a good idea who might be affected), there are currently no plans for a high-profile or even targeted campaign by HMRC to notify those affected that they now may suddenly need to file Tax Returns.
Unfortunately, it is still an individual’s responsibility to check their own tax affairs and notify HMRC of any liability.
Of course, as HMRC are notified of bank and building society interest being paid, the (experienced) cynic might wonder how long after this year’s filing deadline it might be before the HMRC computers do flag up a list of those who ought to have notified, filed and paid their taxes but for whatever reason were unaware that the game had changed.