Date
05 Jun 2023Category
TaxMany UK taxpayers will be unaware of the tax implications and Self-Assessment (SA) filing requirements that have been created by HMRC. This is due to HMRC moving the goalposts through the reduction of certain allowances/exemptions and the increase to the SA threshold for PAYE taxpayers from 2023/24 onwards from £100,000 to £150,000.
The recent tax changes mean more people will likely be required to file tax returns and pay tax on their investment income/gains. It is predicted that those who fall under this widening tax net will face bills of up to £2,000 over two years.
Basically, the additional tax liabilities have been caused by the following:
Capital Gains Tax allowance reduction
Capital Gains Tax (CGT) is payable when certain assets are sold at a gain or otherwise disposed of (for example a deemed disposal can arise when an asset is gifted).
For the 2023/24 tax year the CGT annual exemption will reduce from £12,300 (2022/23 annual exemption) to £6,000. This will reduce further to £3,000 for the 2024/25 tax year. The Office of Tax Simplification (OTS) estimated that due to the changes introduced this could bring an additional 235,000 individuals, (500,000 including Trusts) into the system for reporting gains, of which only 96,000 of those individuals already complete a Self-Assessment Tax Return. Obviously, these statistics could climb even further when the CGT annual exemption reduces further in 2024/25 to £3,000.
ISAs and Private Residence Relief (PRR) on main homes will remain unaffected.
In addition, where proceeds on the sale of a capital asset exceed £50,000, even if there is no capital gain and therefore no tax is due, the taxpayer would still have a requirement to report the disposal to HMRC via the SA regime.
For the 2023/24 tax year the government reduced the tax-free allowance for dividend income from £2,000 to £1,000, and then to £500 for the 2024/25 tax year. In addition, the Government increased the dividend income tax rate in 2022/23 by 1.25% to 8.75% for the basic rate, 33.75% for the higher rate and 39.35% for the additional rate. This has exposed taxpayers twofold.
With such changes, many individuals may now be brought into the requirement for filing a SA tax return. Previously and for those taxpayers who are employed or receiving pensions and relatively small shareholdings/dividends, they would not have been required to file and may be ignorant to the fact that due to the reduction of the allowance this has impacted upon them from both an administrative burden and an additional tax consequence.
As a result of the £1,000 reduction in the dividend allowance for 2023/24, the net cost effect of this for taxpayers will be a maximum increase in their tax liability of £87.50 for a basic rate taxpayer, £337.50 for a higher rate taxpayer and £393.50 for an additional rate taxpayer where they were previously making full use of the dividend allowance.
With further reductions to the tax-free dividend allowance in 2024/25 set to come into force, this will create an additional tax burden of £131.25 for a basic rate taxpayer, £506.25 for a higher rate taxpayer and £590.25 for an additional rate taxpayer.
The increase in the Bank of England base rate will in many cases result in increased interest income from savings held in deposit accounts and the like. Coupled with increasing salaries to assist with the cost of living crisis at a time when income tax bands have been frozen, this is pushing more individuals into higher rates of tax. Subsequently this may require more individuals to file a SA tax return.
With the reduction in the dividend allowance outlined above, many individuals and shareholders of small to medium family businesses, for example, who tailor their profit extraction from their businesses through the utilisation of the annual dividend allowance and basic rate bands, the changes will most likely increase their tax liability and administrative burden significantly. As a result, many will need to review their dividend strategy and look at tax remuneration planning comparing dividends versus salary.
With effect from the 2023/24 tax year the threshold for PAYE taxpayers to remain outside of the SA regime will increase from £100,000 to £150,000. The increase in the self-assessment threshold announced will remain unchanged for the 2022/23 tax year, i.e. at £100,000.
However, should any PAYE taxpayers meet any of the other SA criteria they will still need to file a personal tax return. The other criteria being as follows:
One concern here is that those who make private pension contributions or have allowable expenses may miss the opportunity to claim tax relief unless they are aware of these aspects and seek advice.
Should a taxpayer be unclear on whether they meet the criteria for self-assessment or not, HMRC has this online tool to check whether they need to submit a tax return.
However, those who are considered to fall outside of the regime will be notified after their 2023 Tax Return has been filed via a SA Exit letter.
As a result of these moving goalposts, taxpayers will not necessarily be aware as to whether they are now caught by the new rules and therefore have tax returns to file and tax payments to make on or before 31 January in some cases.
Many could be facing a nasty surprise in the form of tax bills and penalties for missing the deadline to file a tax return due to being innocently unaware of the requirement to complete. For advice on any personal tax matters, we are here to help.
If you have any questions in relation to tax returns, whether you will now be required to submit one or if you would like to discuss anything mentioned in this article, please get in touch with a member of our specialist team or your usual Azets advisor.
