The move to take people out of self assessment is designed to help HMRC manage their workload and nothing to do with simplification, tax expert warns
The government’s plan to take people with PAYE-linked earnings of between £100,000 and £150,000 per annum and no other substantive sources of income, out of the self assessment tax return system will result in many taxpayers in this bracket overpaying taxes, says Blick Rothenberg.
HMRC has confirmed that from tax year 2023 to 2024 onwards, the self assessment threshold for taxpayers taxed through PAYE only, will increase from £100,000 to £150,000.
Affected taxpayers do not need to do anything now as the self assessment threshold for 2022/23 tax returns remains at £100,000.
They will receive a self assessment exit letter if they submit a 2022-23 return showing income between £100,000 and £150,000 taxed through PAYE and they do not have additional income to report.
Robert Salter, a tax technical specialist at Blick Rothenberg, said: ‘Whilst many people who only have employment income and earn between £100,000 and £150,000 per annum will welcome the fact that the government is planning to remove their self assessment filing obligation for the 2023/24 tax year (and later years), it is always important to dig into tax changes and really understand the implications of such developments.
‘The reality is that HMRC have been underfunded (and hence understaffed) for a number of years. The move to take people out of self assessment appears purely designed to help HMRC manage their workload and is nothing to do with ‘tax simplification’ or helping ensure that ‘taxpayers only pay the correct amount of tax’.
The tapering effect of the tax free allowance for those earning between £100,000 and £150,000 means that completing a tax return is often necessary to ensure that the correct tax is paid, particularly taking into account deductions and allowances for gift aid contributions, personal pension inputs, professional subscriptions, and business expenses.
Salter added: ‘The fact that the personal tax allowance is written off on a gradual basis for people who earn between £100,000 and £125,000 per annum, means that the tax affairs of people in this income bracket can be more complicated than the situation for many people earning much higher salaries.
‘Moreover, people who lose their personal allowance are paying an effective tax rate of 60% on their income between £100,000 and £125,000 per annum.’
‘Whilst HMRC should – in theory – be able to adjust people’s tax affairs for various types of deduction and allowances with a tax return, the reality is that HMRC consistently fails to automatically adjust a taxpayer’s tax affairs for such matters.
‘By taking employees out of self assessment, there is a real risk that people in this range will end up paying too much tax and not getting refunds, to which they are genuinely entitled.’
Salter added: ‘It is worth remembering that even a relatively small ‘failure’ on the part of HMRC – especially for those in the effective 60% tax rate – could cost them a significant amount of money. For example, if HMRC simply fails to give a taxpayer relief for a professional subscription of £400, that results in a 60% taxpayer having an excess tax charge of £250.’
Salter sees the change as a negative decision designed to collect more tax rather than simplify the tax system.
He added: ‘If the government is serious about ensuring people only pay the right amount of tax, the government needs to withdraw this change. Otherwise, in practice, it is just another sign that the government is looking to increase the taxes actually paid by many taxpayers by stealth.’
