Self Assessment threshold change: Solution or problem?

In case you missed HMRC’s quiet announcement earlier this year, the thresholds determining who will need to file a tax return are being revised for the 2023/24 tax year onwards. The new requirements were published via HMRC’s Agent Update 108 and will affect employees with taxable income between £100,000 and £150,000 who have no other reason to file a return.

As the Agent Update has a relatively small readership, we suspect many affected taxpayers, especially the unrepresented, will not yet be aware of the change.

What’s changing?

From 2023/24 onwards, the income threshold above which taxpayers who only have PAYE income are required to submit a Self-Assessment return will increase from £100,000 to £150,000. Employees with income of less than £150,000 will no longer need to file a tax return, unless they have another reason to do so – for instance if they have untaxed income from property rentals or self-employment, or the High Income Child Benefit Charge applies.

It’s important to stress that the announcement only affects 2023/24 onwards – the thresholds used for 2022/23 remain unchanged, so anyone with taxable income over £100,000 in 2022/23 will still need to file a tax return for that year.

How will people be informed?

HMRC intend to issue a Self-Assessment “exit letter” (SA251) to anyone filing a 2022/23 tax return showing PAYE income of between £100,000 and £150,000 where there are no other circumstances which would oblige them to file a tax return in future.

Our concern is that many unrepresented taxpayers will happily take these letters at face value as saving them from the annual headache of completing a tax return. However, they may not be aware of complications which could result from not filing a tax return each year.

What problems could this cause?

The threshold change could result in taxpayers inadvertently overpaying or underpaying tax.

The current £100,000 income threshold makes good sense, as this is the level at which the personal allowance starts to be restricted. Employees with earnings in the £100,000 to £125,140 band gradually have their personal allowance tapered away, and can see their tax liabilities fluctuate considerably with relatively small changes in income, due to the effective 60% marginal tax rates in this income band.

Adding in common complexities such as Gift Aid donations and non-payroll pension contributions further complicates matters, as can bonuses and even small amounts of interest and dividend income.

For example, Jim is an employee whose only source of income is a salary of £110,000. At this level of income, he is not entitled to the full personal allowance. If Jim makes a personal pension contribution he can claim not only the higher-rate tax relief available, but also the tax relief due as a result of reinstating some or all of his personal allowance. If Jim is not obliged to file a tax return, these tax reliefs may go unclaimed.

On the other hand, Jane, an employee with earnings of £100,000, would be entitled to a full personal allowance in the absence of any other income. In 2023/24, she also receives £500 of bank interest and £500 of dividend income. The bank interest and dividend income are within Jane’s personal savings allowance and dividend allowance respectively, so no tax is payable on this unearned income. However, Jane’s total income is now £101,000 – meaning she loses £500 of her personal allowance. In the absence of a tax return Jane will underpay tax by £300 (60% x £500).

Once the Self-Assessment threshold increases to £150,000, neither Jim nor Jane will be required to submit a tax return but would still be expected to update HMRC regarding the issues outlined above – in particular Jane’s additional tax liability. Without the tax return as a prompt, these issues could be overlooked.

In theory, HMRC should be able to update both Jim and Jane’s PAYE codes to correct their 2023/24 tax positions going forward, but this cannot be guaranteed. Setting the tax return threshold at £100,000 of income provided a safety net to reduce the risk of these issues going unnoticed.

The example of Jane is particularly concerning given the potential for penalties and interest in respect of any failure to report the underpayment to HMRC. In a time of rising interest rates for savers, the risk of bank interest resulting in underpayments of tax for those with taxable income over £100,000 could increase.

What’s the solution?

HMRC have access to some of the data needed to allow them to adjust PAYE codes to correct the type of tax issues considered above, but not all of it. For instance, HMRC’s receive bank interest data but their ability to match it with individual taxpayers is by no means perfect. To our knowledge they have no way of monitoring listed shareholdings and therefore dividends paid to taxpayers each year. Dividends from unlisted companies would also be unknown to HMRC.

Most under or overpayments of tax arising from issues such as those highlighted for Jim and Jane above will therefore need to be resolved by the taxpayer (or their agent) contacting HMRC and arranging for an adjustment to their PAYE code. However, this requires unprompted action, together with knowledge of the employee’s wider tax affairs and an understanding of the implications of sundry income or available tax reliefs.

For taxpayers concerned by the above, the option should still exist to continue filing tax returns as a reconciliation exercise to ensure the correct amount of tax is paid each year. Anyone wishing to continue filing returns from 2023/24 onwards who is removed from Self-Assessment would be best advised to contact HMRC to request a tax return is issued rather than filing one unprompted, to facilitate smooth processing of that return.