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Woman surfing AccountingWEB Savers ride the tax tide due to rising rates
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Savers ride the tax tide due to rising rates

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As a result of rising interest rates, millions will now need to pay tax on savings income in 2023/2024. HMRC's guidance states these people can rely on the tax authority to deal with this issue, but how true this is. 

17th Nov 2023
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A freedom of information request obtained by investment platform, AJ Bell showed that up to 2.7 million people will need to pay tax on savings income in 2023/24.

It represents an increase of one million people compared with the number expected to pay tax on savings income in the previous tax year. It also includes 1.4 million basic rate taxpayers. 

As rates have risen, our members have expressed concerns to us that unrepresented individuals may not realise they have a tax liability. 

Background 

While the following will be familiar to most AccountingWEB readers, anyone outside of tax might find a potted history helpful to set the scene. 

Up until April 2016, banks and building societies paid interest after deduction of basic rate tax. For every £100 of interest earned, the saver was credited with £80 and the bank paid £20 to HMRC on their behalf. 

This worked well for basic rate taxpayers but was a hassle for both higher rate taxpayers and those on lower earnings. Higher rate taxpayers needed to contact HMRC to declare additional tax, while those with lower earnings, who didn’t need to pay the tax which had been deducted, had to recover what they had effectively overpaid. This meant either completing an R40 or registering with their bank or building society to receive their interest gross. Not every lower earner managed to do this, and several lost out.

From 6 April 2016, the government told the banks to stop deducting tax and gave us all a ‘personal savings allowance’ (PSA) instead. While technically a savings nil-rate band and not an allowance, it effectively allows people an amount of tax-free savings interest, with the amount dependent on their income. 

The allowance is £1,000 for those with a total income (including savings) of up to £50,270. It drops to £500 for higher rate taxpayers, and nil for additional rate taxpayers earning over £125,140 (2023/24 rates). This allows those on lower incomes to have more tax-free interest than those on higher incomes. 

The PSA is in addition to the starting rate for savings, which can benefit lower earners whose savings and other income are less than £17,570. 

What’s the problem?

When the policy was first introduced, it was estimated that around 95% of taxpayers would not have any tax to pay on their savings income. Interest rates were low, and people needed significant cash savings (on top of anything held in tax-free ISAs) to exceed the £1,000 or £500 threshold. 

Now that savings rates have increased to 5-6% in the top paying accounts, savings of £16,700-£20,000 could be enough to push a basic rate saver into tax in 2023/24. Those with larger savings may also have tripped the limits in 2022/23 when rates first started to rise. 

What should savers do? 

The major concern for most people in this position is whether they will need to complete a tax return. Reassuringly for them, HMRC’s current advice is basically, don’t worry, we’ll sort it. HMRC only asks those with substantial interest (over £10,000) to register for self assessment.  

Pre-population 

HMRC is able to identify any additional tax due based on information from banks and building societies. At the end of every tax year, these institutions report the interest they have paid out per account, including details of the individual’s name, address and (if known) NINO and date of birth. HMRC then completes a massive data matching exercise between July and October to link around 100 million accounts to the taxpayers on their records. 

As long as HMRC can match the details from the bank or building society to the right individual, they can use details of employment or pension income received through RTI to issue either a P800 to collect the tax through a future PAYE code, or a Simple Assessment. 

Where everything works, the bank sends the right details and that system of matching works, then the taxpayer shouldn’t have to do anything other than check HMRC’s figures. 

Our concern is what happens if that doesn’t go right and how then the guidance of do nothing and the law interact. 

Members tell us that P800s and Simple Assessments are not always accurate. Plus, unless HMRC issues a taxpayer with a Simple Assessment, strictly TMA 1970 requires an individual who is not already in self assessment to notify HMRC if they have a tax liability by 5 October following the end of the tax year in which it arose. This deadline does not sit comfortably with the issue of P800s and Simple Assessments between July and the end of October. 

That led us and the Low Incomes Tax Reform Group to contact HMRC for guidance, who came back to say that it was “relatively clear that the customer needs to advise HMRC of any untaxed interest in excess of £1000”. This is completely contradictory to the gov.uk guidance referenced above. 

So what now? 

I was recently asked to speak about this issue on BBC Radio 4’s Moneybox. When the BBC approached HMRC’s press office, they were adamant that the correct course of action was to wait for HMRC to resolve things. 

While we can appreciate that HMRC will not want contact from 2.7m people next year when, in theory, existing systems should sort things out, we do think it is important that people know what to do if they don’t hear from HMRC by the end of October when HMRC have usually finished their reconciliation run. 

For example, if someone has exceeded their savings allowance in 2022/23 and isn’t in self assessment, it would seem sensible at this stage to proactively report their interest details if they have not heard from HMRC. This can be done online via the Personal Tax Account, post, webchat or on the phone. 

Anyone in this position should be prepared to provide a full breakdown of their interest income from 6 April 2022 to 5 April 2023 on an account by account basis. This allows HMRC to cross check figures to those provided to the banks. Without this detail, there is a risk that interest figures self-reported by taxpayers might be added to figures supplied by banks and building societies, resulting in duplication.

While hopefully, the number of people who fall through the net will be small, to avoid longer term consequences if anything is missed, it is going to be important to encourage everyone to think a bit harder about their savings while interest rates are high

 

Replies (8)

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By Justin Bryant
17th Nov 2023 16:11

It's been well documented here that no-one, including HMRC, knows what s7 TMA 1970 actually means re "chargeable to income tax" in the context of personal allowances (which must be claimed) etc.

https://www.legislation.gov.uk/ukpga/1970/9/section/7
https://www.legislation.gov.uk/ukpga/2007/3/part/3/chapter/2/crossheadin...
https://www.legislation.gov.uk/ukpga/2007/3/section/56

For example from the link below: "Income that is covered by your personal allowance still remains taxable income"

https://www.litrg.org.uk/tax-guides/tax-basics/what-tax-allowances-am-i-...

Surely "taxable income" has the same meaning as income "chargeable to income tax"?

In practice, HMRC interpret s 7 to mean whatever they want it to mean.

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Replying to Justin Bryant:
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By richard thomas
18th Nov 2023 11:27

I beg to differ. I know what “chargeable to income tax” in s 7 TMA 1970 actually means. It means the aggregate of the components of income that is charged to tax that are ones to which the taxpayer is entitled, and which enter the section 23 ITA computation at Step 1.

The phrase is not to be confused with the words “chargeable to income tax” in section 8(1) TMA which has a very different meaning, as provided for by section 8(1AA)(1).

I agree LITRG’s “taxable income” means the same as in section 7. Using that phrase, which is more intelligible to the average LITRG client, doesn’t carry any implication that they don’t know what it means.

It remains remarkable to me that despite the strictures of (competent) judges, especially of Lord Macmillan in the Codification Committee’s report, that the vocabulary of the administration and management of income tax is still so confusing. You’d have thought that both the “self-assessment” legislation of 1994, the Income Tax Act 2007 and possibly the OTS gave ample opportunity to tidy this up.

But as I’ve impliedly hinted at in my first paragraph (where I have chosen my words very carefully) the UK is, with a few possible nearby exceptions, unique in both stating that income is chargeable to tax (see eg s 5 ITTOIA) and that people are chargeable to tax. Contrast this with section 1 of the US Internal Revenue Code 1986.

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Replying to richard thomas:
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By Justin Bryant
18th Nov 2023 13:49

Possibly you're the only one who understands this. It' still as clear as mud to me. See: https://www.accountingweb.co.uk/any-answers/what-is-the-penalty-for

Does someone with £10k UK bank interest income (and nothing else) have to notify under s7 (if in previous years they've had £0 income/gains and no SA100 filings nor s8 notices) and if not why not (considering the PA must be claimed)?

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Replying to Justin Bryant:
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By Justin Bryant
22nd Nov 2023 14:08

This seems to confirm my view that it's all a bit of a mess: https://www.taxation.co.uk/articles/collecting-tax-outside-self-assessme...

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Replying to Justin Bryant:
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By Justin Bryant
28th Nov 2023 09:17

The answer is here and it's a bit bonkers.
https://www.accountingweb.co.uk/any-answers/infants-income-exceeds-pa-re...

Implicitly, under HMRC's pramatic approach to s7, taxpayers self-assess tax deductible expenses etc. without actually filing a SA100 to check if they have to notify under s7 in the 1st place. Bonkers!

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Morph
By kevinringer
20th Nov 2023 10:15

This problem is not just confined to the increase in interest rates meaning savers are receiving decent interest for the first time since the PSA was introduced, we also have the reducing Dividend Allowance and the freezing of the Personal Allowance against increases in income. I know HMRC have been warned of these problems repeatedly by the PBs, and on the Agent Forum. But HMRC are sticking their head in the sand. HMRC don't want these taxpayers to report via SA even though their care clear benefits to HMRC (and agents). There's no point HMRC saying reporting can be made via the PTA because agents don't have access to the PTA. I feel the solution, from an agents and HMRC's perspective, is to permit taxpayers to voluntarily register for SA.

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paddle steamer
By DJKL
20th Nov 2023 13:27

Relying on HMRC for interest figures is not advisable. A person whose return I still do had over £2k interest and £2k divs, she submitted her return and paid the tax early Oct.

Last week we got a Tax Calc (P800) from HMRC, the interest figure they used bore no relation to the submitted figures (It was too low), they have no dividends in the Calc, they have not allowed for the tax paid by taxpayer direct in October only the tax deducted from a pension received, accordingly I just spent 30 minutes to the person on the phone trying to reassure them that the HMRC demand for £91.86 was nonsense, the figures were made up, please just ignore. (They also have a mysterious adjustment of £23.21 which I think is their guess at b/fwd tax due and is also a nonsense)

Another example of HMRC talking the talk whilst not being able to walk the walk.

Thanks (1)
By birdman
20th Nov 2023 22:40

As HMRC are still happy to issue P800s and send repayments to SA-registered clients with tax liabilities, their "matching" abilities are clearly somewhat lacking.

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