Is HMRC tax software STILL wrong?

Income not being allocated in the most tax efficient order

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I've just done a tax return for one of my clients on HMRC Online where it seems to have treated bank interest incorrectly. It seems to have allocated it to the basic rate band, thus nudging taxable dividends into the higher rate band. Figures as follows:

  • Salary - £8,160
  • Office rent - £1,500
  • Less rental exps - £208
  • Dividends - £35,798
  • Bank interest - £37
  • Gift Aid - £200 net

Total income is therefore £33,787 and the adjusted higher rate threshold is £33,750.

You can order your income in the most tax efficient way, so although bank interest would normally come before dividends in the queue to be taxed, in this case it should come after, so the dividends all fall into the basic rate band whilst the interest is still sheltered by the £500 PSA. The software should do this automatically. Yet HMRC Online shows £37 dividends being taxed at 32.5%.

It seems to have messed up on my own tax return too, as it allocated dividends to what was left of my personal allowance after salary and rent in preference to interest over and above the tax-free £6k, thus pushing the tax bill up another £36.

Have I missed something here or are there still gremlins in the HMRC systems? I thought all these glitches were supposed to have been sorted out last year.

Replies (8)

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By emanresu
31st Jul 2018 19:29

You cannot "order your income in the most tax efficient way". There is still a fixed order of taxation.

You have the right to distribute personal allowances in the most tax efficient way.

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Replying to emanresu:
By cfield
31st Jul 2018 19:57

Ah that was it. I knew I was missing something.

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By Wanderer
31st Jul 2018 19:44

Quote:

Have I missed something here or are there still gremlins in the HMRC systems? I thought all these glitches were supposed to have been sorted out last year.

Here's the latest, 20/07/2018, details of the 2017/2018 problems, there's only 25 pages of them:-
http://admin.btcsoftware.co.uk/download/2018-exc-indi-latest.pdf
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By Tim Vane
31st Jul 2018 20:00

I agree with the replies above.

There are lots of problems with the HMRC computation, but in this case it would get the correct answer.

I suspect your own tax return is also correct, as you appear to misunderstand the rules.

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Replying to Tim Vane:
By cfield
14th Aug 2018 12:19

Quote:

I suspect your own tax return is also correct, as you appear to misunderstand the rules.

Actually Tim I was right about that as it was caused by the error reported in 2017/18 Online Filing Exclusion # 90. They've known about this since May apparently.

The HMRC Calculator is offsetting dividends against the PA in preference to interest in certain scenarios, just like I said. A fix is planned for 2018/19.

It's really worrying that software firms can get this right but HMRC couldn't for 2 years in a row now. Maybe it's all part of some dastardly plan to privatise the taxman. Well, the private sector could hardly do worse!

Potentially this could cost a taxpayer £1,437.50 if they had no earned income but substantial amounts of both dividends and interest. Fortunately I'm only £36 down and I can't be bothered to file a paper return for that.

Just goes to show though, always do your own calcs.

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Replying to cfield:
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By emanresu
14th Aug 2018 15:12

Quote:

Quote:

It's really worrying that software firms can get this right but HMRC couldn't for 2 years in a row now. Maybe it's all part of some dastardly plan to privatise the taxman. Well, the private sector could hardly do worse!

If only. Many commercial solutions have reproduced the errors HMRC have made in issue after issue of their specifications. Blindly following HMRC specs adds little value, just as practitioners who blindly use the resulting software without doing a "sanity check" calculation add little value.

The more complex the changes to tax legislation the more this lack of added value has been exposed. Perhaps we are past "peak change" and so the exposure will diminish. Whatever, there will still be the fundamental misunderstanding cases - like this one.

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By Matrix
31st Jul 2018 22:00

Dividends are always the top slice after you have used the personal allowance as tax efficiently as possible.

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Replying to Matrix:
By Tim Vane
31st Jul 2018 23:03

Matrix wrote:

Dividends are always the top slice

Except when there are other slices above them...

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