The new prepopulation data feeds for self-assessment returns are starting to prove their worth. Various APIs allow accountants to access client data direct from HMRC’s system and, after a slow start, 2016/17 information should now be available for the majority of clients. Matt Bailey, founder of Gbooks, looks at the data available and how it can be used, in particular how the information on National Insurance can be incorporated into a client’s tax calculation.
In April 2017 HMRC started to roll out the main part of its data prepopulation service. The new feeds allow accountants to access the PAYE data submitted to HMRC for a tax year, along with information on private pensions, certain state benefits and whether a taxpayer is claiming marriage allowance as transferor or recipient. This data can be imported into a client’s tax return with the click of a button, avoiding the need for manual data entry and helping to avoid errors and omissions.
In addition to the fairly straightforward data on income, benefits and tax paid, HMRC also provides information on Class 1 and Class 2 National Insurance payments. This information can be used to help calculate the Class 2 NI contributions due for self-employed taxpayers, and also to calculate any restriction in Class 4 for taxpayers who had both PAYE and self-employed income during the tax year.
So what information is available on Class 2 National Insurance? HMRC provides those taxpayers who were self-employed (including those working via partnerships etc) with basic information on the Class 2 NI due, based on the number of weeks of self-employment and the weekly rate in place for the year. This amount may be scaled back if the taxpayer started or ceased trading during the year, or if they reached the state retirement age prior to the end of the tax year.
While it sounds simple, it’s worth pointing out some limitations to the data. Taxpayers have until 5 October following the tax year in which they first become self-employed to notify HMRC (and longer to notify about cessation). So it’s possible HMRC will not have the relevant start or end dates when the API is checked, and in some cases will give a different figure if checked in November to that given in April. So the accountant should check whether the figure is correct given the taxpayer’s circumstances.
So what information is provided on Class 1 NICs, and why is this relevant? HMRC provides the amount of earnings for Class 1 purposes that fell between the Primary Threshold and the Upper Earnings Limit. This information will not be available immediately at the start of the new tax year (unlike the basic Class 2 figure), but will be copied across from HMRC’s PAYE system between June and August each year.
This figure is relevant because it can be used to check whether the taxpayer’s Class 4 National Insurance liability needs to be restricted under Regulation 100. This regulation says that taxpayers who have already paid Class 1 NICs at the main rate should not also have to pay the full Class 4 rate (currently 9%) on the normal slice of self-employed income. They can instead scale back the Upper Profits Limit and start paying the lower rate (i.e. 2%) sooner than other self-employed taxpayers.
This is a fiddly calculation to perform, and relies on earnings information that is not always easy to compile, particularly for taxpayers with more than one employment during the year. But it can be worth the effort, with the relief lowering the Class 4 bill by as much as £2,500. So the availability of Class 1 earnings information via the API is welcome, and the accountant’s tax software can use it to calculate an accurate Class 4 NI bill at the time the tax return is prepared.
So where does this all leave accountants? The new API feeds provide new sources of information to make tax returns more accurate, reducing the chances of enquiries (and possible penalties) later on. But the API information will take a few months to become available each year, meaning a tax return prepared in October could be less likely to attract future penalties than one prepared in May. So does this give practitioners (and clients) an incentive to delay preparing tax returns until after the summer?
About Matt Bailey
Founder of Azura Cloud Systems (Gbooks), the leading cloud-based tax and accounts system.