Recent developments in the Self-Assessment tax return criteria have brought significant changes that everyone who files an Income Tax Self-Assessment (ITSA) should be aware of.

Announced in the Autumn Statement 2023 and through various updates and consultations throughout the year, these changes reflect HM Revenue and Customs’ (HMRC) ongoing efforts to simplify and modernise Income Tax services.

Below, we go over some of the key changes to the tax return system and how you should react to them.

Key changes in 2023 

There have been three major announcements regarding the Self-Assessment criteria in 2023:

• Raising the income threshold: The income threshold for filing a Self-Assessment tax return, assuming no other criteria are met, was increased from £100,000 to £150,000. This adjustment applies from the 2023/24 tax year. 
• Simplifying high income child benefit charge: A written ministerial statement in July outlined plans to streamline the process for taxpayers liable for the high income child benefit charge. The Government proposed a system allowing employed taxpayers to pay this charge through their tax code, eliminating the need to register for Self-Assessment. However, further details on this proposal are still pending. 
• Removal of the £150,000 threshold: The Autumn Statement 2023 revealed that the £150,000 income threshold would be completely removed from the 2024/25 tax year onwards. 

Unchanged criteria 

Despite these updates, several criteria for Self-Assessment remain unchanged:

• Self-employment income over £1,000.
• Other untaxed income of £2,500 or more.
• Claims for tax relief on employment expenses exceeding £2,500.
• Income from savings or investments over £10,000 (tax on amounts below this level may be collected through a PAYE coding adjustment).

If you are confused as to whether you need to file a tax return for Income Tax Self-Assessment because of the new thresholds, visit the Government website to check your eligibility.

In some cases, even where income is below £150,000 it may still be relevant to file a Self-Assessment tax return.  For example:

• Individuals earning more than £100,000 may have complicated tax affairs even if main income source is taxed under PAYE
• Additional rate taxpayers are not entitled to the personal savings allowance and so receiving a relatively small amount of bank interest would result in an income tax liability (higher rate tax payers only £500 savings interest free allowance)
• Taxpayers may overpay tax if they fail to claim relief for personal pension contributions or Gift Aid, for example

Alternatively, please get in touch with one of our team to discuss your tax liabilities and filing process.

The bigger picture

While these changes aim to simplify tax compliance many accountants have raised concerns about the piecemeal nature of these amendments potentially causing confusion.

HMRC has confirmed that other criteria are unchanged but continue to be under review.

Having said this, it is important to discuss the changes with your accountant as soon as possible.

Looking forward 

The importance of HMRC’s ongoing developments cannot be overstated, such as the single customer account programme, in enhancing how taxpayers outside of Self-Assessment finalise their income tax liabilities.

As HMRC plans further changes in its digital services and operational processes, the landscape of Self-Assessment is poised for more transformation.

For more detailed information on Self-Assessment criteria, taxpayers are advised to refer to HMRC’s Self-Assessment manual and use their online tool to ascertain if they need to submit a tax return.

Understanding these changes is crucial for taxpayers to remain compliant and navigate the evolving tax landscape effectively so please keep an eye on further updates from HMRC and stay informed and prepared by communicating with your accountant.

If you are concerned about any of the issues raised by changes to the Self-Assessment criteria, please do not hesitate to get in touch with one of our team.  

The Bank of England’s decision to raise interest rates in the first half of 2023 might not have been well-received by those with mortgages or other debts, but it presents a beneficial situation for those accumulating interest in bank accounts.

This is particularly true for law firms, which often hold substantial client funds in interest-bearing accounts.

Funds in designated client accounts, including accrued interest, are considered the client’s property. Any movement of these funds and the interest they generate falls outside the scope of VAT.

In contrast, when client money is kept in a general account and the law firm is entitled to the interest earned, this constitutes exempt income for the firm.

Law firms dealing with both taxable income (like client fees) and exempt income (such as interest on client funds) fall under the partly exempt category for VAT purposes.

They must calculate the proportion of VAT reclaimable from HMRC based on their costs. VAT linked directly to making taxable supplies (like fees) is fully recoverable. However, VAT incurred in earning exempt income (like client interest) is typically non-recoverable.

The VAT on general overhead costs will depend on the proportion of taxable income to total income, a method known as partial exemption calculation. Law firms can also negotiate a special method for this calculation with HMRC in writing.

For partial exemption calculations, financial transactions incidental to the main business activities are excluded from exempt income considerations.

However, HMRC views interest earned on client money held for ordinary business activities as non-incidental and includes it in these calculations.

If the interest earned is substantial, it could limit the VAT recoverable on a firm’s overhead costs. Given the rise in interest rates, law firms might consider negotiating a special method with HMRC or re-evaluating any existing agreements if the rate increase significantly impacts their business.

Act now

It is advisable to re-evaluate your current VAT partial exemption approach. An upswing in interest earned from client funds in general, undesignated accounts could notably alter your VAT recovery stance.

The interest retained from these accounts is likely to be classified by HMRC as exempt income, not merely incidental.

This classification can lead to a reduced recovery percentage on overhead costs under any income-based VAT recovery method.

Previously, you might have qualified for full VAT recovery under the ‘de minimis limit’. This applies when the total VAT on costs linked to exempt activities is less than half of the total VAT incurred and is below £7,500 annually.

However, the spike in interest rates may push you past this threshold, potentially leading to the need to repay exempt input tax incurred over the year and in future tax returns.

Even if you have an existing special method agreed with HMRC in writing, remember that all such agreements contain a clause mandating a review in case of significant business changes.

If the increase in interest rates considerably affects your business, it’s crucial to consider reviewing and possibly renegotiating your method or documenting why the current method still ensures a fair and reasonable recovery of input tax.

To find out more about how this affects law firms and the actions they should take, please contact our dedicated tax team today.

In the current climate of rising inflation rates, many savers are seeing significant returns on their savings and investments.

However, there is often confusion about how to report these earnings to HM Revenue & Customs (HMRC), particularly for earnings outside of an ISA or in addition to income reported via PAYE.

Understanding the tax implications for savings interest is key. It’s essential to know that while the principal amount in your savings isn’t taxed, the interest it generates might be taxable.

Generally, interest on savings is paid without tax deducted, known as receiving interest ‘gross’. In the UK, there’s a specific amount of interest you can earn each tax year tax-free. The tax year for which you’re liable for this interest is based on when you can access it, not when it was earned.

For joint accounts, the interest is typically considered split equally between holders for tax purposes. If your interest exceeds your tax-free allowance, HMRC usually adjusts your tax code for automatic tax collection.

However, if you’re completing a self-assessment tax return, you need to declare this interest yourself. The tax rate on savings interest depends on your usual income tax rate, which could be 0 per cent, 20 per cent, 40 per cent, or 45 per cent.

Taxable savings interest includes interest from banks, building societies, credit unions, investment companies, trusts, peer-to-peer lending, bonds, and certain annuity payments and life insurance contracts.

Your tax on savings interest is based on your total annual income, encompassing all income sources and any applicable reliefs or exemptions. For those earning up to £17,570, calculating your allowance involves your Personal Allowance (usually £12,570) plus £6,000 for the maximum starting rate band for savings and the Personal Savings Allowance.

You then subtract any non-savings income from this total. For instance, someone with a £6,500 salary could earn up to £12,070 in tax-free interest, whereas someone with a £14,500 salary could earn £4,070 tax-free. Beyond these allowances, the basic tax rate of 20 per cent applies.

Your tax-free allowances each year include your Personal Allowance, up to £5,000 from your starting rate for savings, and a £1,000 allowance for savings interest from the Personal Savings Allowance. If your non-savings income exceeds the Personal Allowance, the starting rate for savings decreases by £1 for every £1 earned over this limit.

For earnings between £17,571 and £125,140, the allowance for savings interest is fixed at £1,000 for earnings up to £50,270 and £500 for earnings between £50,271 and £125,140. Above £125,140, there is no tax-free allowance for savings interest.

Tax payments on savings and investments depend on individual circumstances. If employed or receiving a pension, HMRC usually adjusts your tax code for the extra tax due. For savings interest, this adjustment is typically automatic, but you must inform HMRC if you earn between £1,000 and £10,000 in dividend income. Earning over £10,000 from savings and investments requires a self-assessment tax return.

If you self-assess, report any savings or investment income in your regular tax return. If neither situation applies, HMRC will contact you regarding any owed tax on savings interest.

As the deadline for tax returns approaches, if you need to report savings income this year via Self-Assessment, please get in touch with us for assistance.