It seems that not a week goes by without another announcement on how tax is
changing at the moment – the start of the “main residence” relief for
Inheritance Tax; loan relief restrictions for Landlords; Stamp Duty Land Tax
changes for second (or let) properties; Scotland exercising its right to vary
how much income tax is charged on anyone classed as Scottish; and these are just
some of the ones hitting in April. So for many who have previously had little
contact with HM Revenue & Customs because your affairs have been relatively
simple in the past, I suspect that you glanced at the headlines, yawned and
turned to something more interesting.
But are your affairs as simple as they used to be?
Back in April 2016 – a long time ago for some I admit – new rules came into
place for dividends and bank interest with these sources of income now being
paid gross without the benefit of tax credits or deduction. At the same time,
the government introduced a dividend allowance of £5,000 per person and an
allowance for interest of up to £1,000 per person depending on the level of your
taxable income. Simultaneously, there was a tidying up of some little used
allowances and rates of tax that some people probably didn’t even know existed
but took HMRC a disproportionate amount of time to administer. The general idea
was to both sweep away a lot of administration and at the same time allow a lot
of individuals to drop out of the tax compliance regime where they would file a
repayment claim or Self-Assessment Tax Return for relatively small refunds of
tax (and equally took a lot of time for HMRC to look after) by allowing the
dividends or interest to be received gross in the first place.
However, with anything tax-related there is always a law of unexpected
consequences and in changing most investment income from being paid net to gross
there will be a lot of people with investment income who previously had almost
no contact with HMRC from year to year who will now have to register for and
file under Self-Assessment.
Using the long-suffering Bloggs family as an example, in this scenario for
2015/16, Mr Bloggs received pension income of £18,000, plus annual bank interest
of £2,500 (after tax) and dividends of £17,000. In 2015/16, his taxable income
would have amounted to £29,413 after his personal allowance but as his pension
was taxed through PAYE and all of his investment income either had income taxed
at source or carried an equivalent tax credit, the correct tax overall had been
paid/suffered. The chances are he hadn’t spoken to HMRC in many years. Step
forward to 2016/17 and with the same income, Mr Blogg’s taxable income after
personal and investment allowances has now dropped to £21,125 and the tax due on
his investment income has dropped from £2,513 to £1,325.
However, as none of the investment income now has a tax credit or deduction
at source to use, the £1,325 income tax liability on his investment income is
now outstanding as at 5th April. In this scenario, Mr Bloggs will be required
to declare to HMRC by October that he has untaxed sources of income, fill out
the appropriate paperwork and pay his dues unto Caesar (sorry, HMRC).
I am afraid that the usual rules will apply – in the above example, Mr Bloggs
has to notify HMRC of the fact that he has untaxed income by 5th October 2017 at
the latest. This will enable HMRC to either deal with the matter under informal
arrangements or under Self-Assessment.
HMRC will attempt to estimate and collect relatively modest levels of
liability via adjustments to the PAYE code but this is not always possible and
can be rather inaccurate. You would still need to verify your actual income
anyway (either through a Self-Assessment Tax Return, your new online “Digital
Account” or by spending ages on the phone to an understaffed HMRC office).
Larger levels of untaxed income such as the example above would need to be
declared through self-assessment.
So whilst the new investment rules allow HMRC to let a lot of people off the
annual Self-Assessment roundabout in time, they will also be looking for quite a
few new participators to join in. Might you be one of them?
Tax just got a little bit more taxing…..for some, anyway.