Income Tax

In the current tax year, anyone with taxable income of less than £16,850 will have no tax to pay on interest received. This figure is calculated by adding the £5,000 starting rate limit for savings (where 0% of the interest is taxable) to the current £11,850 personal allowance. However, it is important to note that if your total non-savings income exceeds £16,850 then the starting rate limit for savings is unavailable.

There is a tapered relief available if your non-savings income is between £16,850 and £11,850 whereby every £1 of non-savings income above a taxpayer’s personal allowance reduces their starting rate for savings by £1.

In addition to the starting rate for savings, there is also a Personal Savings Allowance (PSA) that was launched in April 2016. This allowance means that for basic-rate taxpayers, the first £1,000 interest on savings income is tax-free. For higher-rate taxpayers, the tax-free personal savings allowance is £500. Anyone earning over £150,000 will not benefit from the new PSA.

Interest from savings products such as ISA’s and premium bond wins do not count towards the limit. So, some taxpayers with tax-free accounts and higher savings can still continue to benefit from the relevant PSA limits. Banks and building societies no longer deduct tax from your account interest as a matter of course. Taxpayers who still need to pay tax on savings income need to declare this as part of their annual Self-Assessment tax return.

Taxpayers that have overpaid tax on savings interest can submit a claim to have the tax repaid. Claims can be backdated for up to four years after the end of the current tax year. This means that claims can still be made for overpaid interest dating back as far as the 2014-15 tax year. The deadline for making claims for the 2014-15 tax year is 5 April 2019.

Personal Tax Accounts (PTAs) were launched in 2015 and works as an online resource to allow taxpayers to review and update their details in real time. For many routine requests and services using the PTA can avoid having to phone or write to HMRC.

Every individual in the UK that pays tax has a PTA, but taxpayers must sign up in order to access and use the service. This can be done using either the Government Gateway or a GOV.UK Verify account. 

HMRC has confirmed that the following services are currently available on the PTA:

• check your Income Tax estimate and tax code;
• fill in, send and view a personal tax return;
• claim a tax refund;
• check and manage your tax credits;
• check your State Pension;
• track tax forms that you’ve submitted online;
• check or update your Marriage Allowance;
• tell HMRC about a change of address;
• check or update benefits you get from work, for example company car details and medical insurance;
• find your National Insurance number.

HMRC will continue to add more services in the future to allow taxpayers to more fully manage their tax affairs online. The PTA is part of HMRC’s overriding strategy to move to a fully digital tax service, which will eventually see the end of an annual tax return with all personal tax affairs being managed through the PTA.

There are a number of reasons why a taxpayer needs to complete a Self Assessment return. This includes, if they are self-employed, a company director, have an annual income over £100,000 and / or have income from savings, investment or property.

Taxpayers that need to complete a Self Assessment return for the first time, should inform HMRC as soon as possible. The latest date that HMRC should be notified is by 5 October following the end of the tax year for which a Self Assessment return needs to be filed.

In certain circumstances HMRC also asks taxpayers to complete tax returns. HMRC has an online tool that can help taxpayers ascertain whether they are required to submit a self assessment return. HMRC publishes a list of taxpayers who would usually be required to submit a Self Assessment return.

The list includes:

• The self-employed;
• Taxpayers who had £2,500 or more in untaxed income;
• Those with savings or investment income of £10,000 or more before tax;
• Taxpayers who made profits from selling things like shares, a second home or other chargeable assets and need to pay Capital Gains Tax;
• Company directors – unless it was for a non-profit organisation (such as a charity) and you didn’t get any pay or benefits, like a company car;
• Taxpayers whose income (or that of their partner’s) was over £50,000 and one of you claimed Child Benefit;
• Taxpayers who had income from abroad that they needed to pay tax on;
• Taxpayers who lived abroad and had a UK income;
• Those whose income was over £100,000.

An overdrawn director’s loan account is created when a director (or other close family members) ‘borrows’ money from their company. Many companies, particularly ‘close’ private companies, pay for personal expenses of directors using company funds. Where these payments do not form part of a director’s remuneration, they are usually posted to the director’s loan account (DLA).

The DLA can represent cash drawn by a director as well as other drawings by a director (including personal bills paid by the company). Whilst it is quite common for small company accounts to show an overdrawn position on a DLA, this can create some unwelcome consequences for both the company and the director. The rules are further complicated if the loan is for more than £10,000 and the loan must be reported on your personal Self Assessment tax return. There are also further income tax costs if the loan is written off or ‘released’ (not repaid) by the company.

Planning note:

Small business owners need to be mindful that withdrawing funds from their company in this way can have unwanted tax consequences. The CT, Income Tax and National Insurance impacts of using a DLA must be carefully considered. Please call if you have concerns in this area.

The High Income Child Benefit Charge (HICBC) came into force in January 2013. It applies to taxpayers whose income exceeds £50,000 in a tax year and who are in receipt of child benefit. The charge claws back the financial benefit of receiving child benefit either by reducing or removing the benefit entirely.

HMRC has confirmed that it is reviewing cases where a failure to notify penalty was issued for the tax years 2013-14, 2014-15, and 2015-16, to taxpayers who did not register for HICBC. HMRC will review cases for these years and consider issuing penalty refunds to taxpayers that had a reasonable excuse for not paying the HICBC. Under normal circumstances, HMRC would only entertain a claim for a reasonable excuse directly from a taxpayer. However, in this case, HMRC are proactively reviewing these cases.

This will include families who made a claim for Child Benefit before High Income Child Benefit Charge was introduced, and where one partner’s income subsequently increased to over £50,000 on or after the 2013-14 tax year. This is because the higher earner in a household is the person who pays the charge and may not be the person claiming Child Benefit on behalf of the household.

HMRC is also writing to taxpayers who might be liable to the charge in 2016-17 and 2017-18, to help them meet their tax obligations in time and thus avoid paying a penalty.

An HMRC spokesperson said:

‘HMRC is listening to customers and stakeholders, and reviewing our approach to HICBC to ensure we are treating everyone fairly. Customers do not need to ask for a penalty refund or contact HMRC. We will issue the refunds, where due, over the next six months.’

The introduction of Making Tax Digital (MTD) will fundamentally change the way businesses, the self-employed and landlords interact with HMRC. The new regime will require businesses and individuals to register, file, pay and update their information using a new online tax account.

The new regime is due to start in April 2019 for VAT purposes only, when some 1 million businesses with a turnover above the VAT threshold will be required to keep their records digitally and provide their VAT return information to HMRC using MTD compatible software.

HMRC is also allowing a number of taxpayers and agents to use software to make Income Tax updates. This is part of a live pilot to test and develop the MTD service for Income Tax. As part of the MTD pilot taxpayers (or their agents) may be able to send Income Tax updates to HMRC on using software, instead of filing a Self Assessment tax return.

The introduction of MTD was first announced as part of the March 2015 Budget measures, and will ultimately see HMRC move to a fully digital tax system. An official launch date for the MTD service for Income Tax has yet to be announced, but it is unlikely to be before April 2020.

The Chancellor has confirmed that from 2019-20 the personal allowance will increase to £12,500 (an increase from the current £11,850 allowance) and the basic rate limit to £37,500. As a result, the higher rate threshold will increase to £50,000 from April 2019.

These increases deliver on the government’s manifesto commitment to increase the basic personal allowance to £12,500 and the higher rate threshold to £50,000 by the end of the current Parliament a year ahead of schedule. The Chancellor also set the personal allowance at £12,500 and basic rate limit at £37,500 for 2020-21 and confirmed that from 2021-22 onwards, the personal allowance and basic rate limit will be indexed with the Consumer Price Index (CPI).

The changes to the basic rate limit will apply to non-savings and non-dividend income in England, Wales and Northern Ireland and to savings and dividend income in the UK. Since April 2017, the Scottish Parliament sets the basic rate and higher rate thresholds for non-savings and non-dividend income in Scotland.

For high earning taxpayers the personal allowance is gradually withdrawn by £1 for every £2 of adjusted net income over £100,000 irrespective of age. Adjusted net income is total taxable income before any personal allowances, less certain tax reliefs such as trading losses and certain charitable donations and pension contributions. Any taxpayers with an adjusted net income of between £100,000 and £125,000 in 2019-20 will pay an effective marginal rate of tax of around 60% as the tax-free personal allowance is gradually withdrawn.

HMRC has published a news release to remind taxpayers that there is now less than 100 days to file their 2017-18 tax return. Last year over 11 million taxpayers completed a 2016-17 self assessment tax return, with 10.7 million of these taxpayers doing so on time.

The deadline for submitting 2017-18 self assessment tax returns online is 31 January 2019. Taxpayers should also be aware that payment of any tax due should also be made by this date. This includes both the payment of any balance of self assessment liability for the 2017-18, plus any payment on account due for the current 2018-19 tax year.

Any taxpayers that are filing online for the first time should ensure that they register to use HMRC’s self assessment online service as soon as possible. Once registered it can take up to seven working days for an activation code to be sent by mail. All filings should now be made online as the deadline for submitting paper returns for 2017-18 expired on 31 October 2018. There are penalties for late self assessment returns including an automatic £100 penalty for submitting a late return even if there was no tax to pay or the tax due was paid on time.

Over 4.8 million taxpayers waited until January 2018 to file their 2016-17 tax return with over 750,000 waiting until the final day of 31 January. HMRC is encouraging taxpayers to complete their tax return as early as possible to avoid working during the upcoming holiday period or getting more stressed as the 31 January 2019 filing date looms.

Taxpayers with certain underpayments in the 2017-18 tax year can elect to have this amount collected via their tax code (in 2019-20), provided they are in employment or in receipt of a UK-based pension. The deadline to apply to have tax collected through your tax code is 30 December 2018.

A recent Upper Tribunal case examined whether a sole trader operating a skip hire business was entitled to Income Tax relief on irrecoverable loans made to a company. The company was owned by the sole trader’s father. HMRC had rejected the claim for Income Tax relief on the basis that the loans were capital investments and were not wholly and exclusively laid out for the purposes of trade.

The sole trader appealed this decision to the First-tier Tribunal (FTT) where his appeal was dismissed. The sole trader was then granted permission to appeal the FTT’s decision to the Upper Tribunal. In an unusual turn of events the Upper Tribunal agreed that the appeal should be remitted to the FTT for a re-hearing by a different panel. That re-hearing took place in April 2016 more than 2 years after the original hearing and the sole trader’ appeal was once again dismissed.

The Upper Tribunal finally heard the taxpayer’s appeal earlier this year. The Upper Tribunal examined a number of factors relating to the decisions of the FTT. The Upper Tribunal found that the sole trader was unable to satisfy the burden of proof as to the existence or amount of the loans in question and whether the loans were capital or revenue in nature and made wholly and exclusively for the purposes of his skip hire business.

Further, on the basis that the loans were capital in nature. any associated losses should be considered a capital loss. The sole trader’s contention that the loan was intended to ensure that the company could continue to provide him with essential business facilities was rejected. The Upper Tribunal dismissed the taxpayer’s appeal.