Joining the MTD ITSA pilot

Many businesses and agents are already keeping digital records and providing updates to HMRC as part of a live pilot to test and develop the Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA). Under the pilot, qualifying landlords and sole traders (or their agents) can use software to keep digital records and send Income Tax updates instead of filing a Self-Assessment tax return.

The full launch of MTD for ITSA is expected to start from 6 April 2024. The rules will initially apply to taxpayers who file ITSA returns with business or property income over £10,000 annually. General partnerships will not be required to join MTD for ITSA until a year later, in April 2025. A new system of penalties for the late filing and late payment of tax for ITSA will also apply. Taxpayers interested in signing up for the pilot should contact their software provider or agent for further information. 

HMRC’s guidance on who can use the pilot has been updated as the pilot has been expanded. Currently to be eligible, taxpayers need to have an accounting period that aligns exactly to the tax year (6 April to 5 April) to join the 2022-23 pilot. The option to sign-up as an individual for MTD for ITSA is currently only available to individuals using a recognised provider offering software that is compatible with MTD for ITSA.

The pilot currently needs taxpayers who file for:

  • self-employment (including multiple self-employments)
  • UK property
  • Gift Aid
  • Pay As You Earn income, including employment income and occupational pensions (excluding those with a coded-out liability)
  • UK interest
  • UK dividends

Later this tax year, the pilot will be expanded to include the following customer types

  • pension contributions
  • CIS
  • Student Loans
  • additional Self-Assessment (SA 101)
  • foreign income from property
  • voluntary class 2 NICs
  • capital gains
  • marriage allowance.

Taxable and tax-free State Benefits

Whilst there are a large number of state benefits available, it is not clear which of these benefits are taxable and which are tax-free.

HMRC’s guidance provides the following list of the most common state benefits that are taxable i.e., Income Tax is potentially payable, subject to the usual allowances and reliefs:

  • Bereavement Allowance (previously Widow’s pension)
  • Carer’s Allowance
  • contribution-based Employment and Support Allowance (ESA)
  • Incapacity Benefit (from the 29th week you get it)
  • Jobseeker’s Allowance (JSA)
  • pensions paid by the Industrial Death Benefit scheme
  • the State Pension
  • Widowed Parent’s Allowance

The most common state benefits you do not have to pay Income Tax on are:

  • Attendance Allowance
  • Bereavement support payment
  • Child Benefit (income-based – use the Child Benefit tax calculator to see if you’ll have to pay tax)
  • Child Tax Credit
  • Disability Living Allowance (DLA)
  • free TV licence for over-75s
  • Guardian’s Allowance
  • Housing Benefit
  • Income Support – though you may have to pay tax on Income Support if you’re involved in a strike
  • income-related Employment and Support Allowance (ESA)
  • Industrial Injuries Benefit
  • lump-sum bereavement payments
  • Maternity Allowance
  • Pension Credit
  • Personal Independence Payment (PIP)
  • Severe Disablement Allowance
  • Universal Credit
  • War Widow’s Pension
  • Winter Fuel Payments and Christmas Bonus
  • Working Tax Credit

Back to school – help with childcare costs

As children have returned to school, HMRC is reminding parents that they may be eligible for Tax-Free Childcare (TFC) to help pay for breakfast and after school clubs.

The TFC scheme can help parents of children aged up to 11 years old (17 for those with certain disabilities). The TFC scheme supports working families with their childcare costs. There are many registered childcare providers including childminders, breakfast and after school clubs and approved play schemes signed up across the UK. Parents can pay into their account regularly and save up their TFC allowance to use during school holidays. 

The TFC scheme provides for a government top-up on parental contributions. For every £8 contributed by parents an additional £2 top up payment will be funded by Government up to a maximum total of £10,000 per child per year. This will give parents an annual savings of up to £2,000 per child (and up to £4,000 for disabled children until the age of 17) in childcare costs. 

The TFC scheme is open to all qualifying parents including the self-employed and those on a minimum wage. The scheme is also available to parents on paid sick leave as well as those on paid and unpaid statutory maternity, paternity and adoption leave. In order to be eligible to use the scheme parents will have to be in work at least 16 hours per week and earn at least the National Minimum Wage or Living Wage. If either parent earns more than £100,000, both parents are unable to use the scheme.

HMRC’s Director General for Customer Services, said:

‘Tax-Free Childcare can make a big difference to families, helping with the bills for things like wraparound care for school children, nurseries, childminders and holiday clubs. It’s easy to register – search ‘Tax-Free Childcare’ on GOV.UK.

How dividends are taxed

The dividend tax allowance was first introduced in 2016 and replaced the old dividend tax credit with an annual £5,000 dividend allowance. Tax was payable on dividends received over this amount. The tax-free dividend allowance was reduced to £2,000 with effect from 6 April 2018 and remains fixed at that level ever since. The 1.25% increase in NIC contributions that came into effect on 6 April 2022 was mirrored by a similar increase in the tax charge on dividends. 

This means that the tax rates for dividends received in 2022-23 (in excess of the dividend tax allowance) are taxed as follows:

  • 8.75% for basic rate taxpayers will pay tax on dividends;
  • 33.75% for higher rate taxpayers will pay tax on dividends; and
  • 39.35% for additional rate taxpayers will pay tax on dividends.

Dividends that fall within your Personal Allowance do not count towards your dividend allowance. Depending on your other income sources and the amount of dividends received, you may pay tax at more than one rate on dividends received.

If you receive up to £10,000 in dividends, you can ask HMRC to change your tax code and the tax due will be taken from your wages or pension or you can enter the dividends on your Self-Assessment tax return if you already complete a return. You do not need to notify HMRC if the dividends you receive are within your dividend allowance for the tax year.

If you have received over £10,000 in dividends, you will need to complete a Self-Assessment tax return. If you do not usually send a tax return, you will need to register by 5 October following the tax year in which you received the relevant dividend income.

Do you qualify for the marriage allowance?

HMRC is using the wedding season to issue a reminder to married couples and those in civil partnerships to sign up for marriage allowance if they are eligible and haven’t yet done so.

The marriage allowance applies to married couples and those in a civil partnership where a spouse or civil partner doesn’t pay tax or doesn’t pay tax above the basic rate threshold for Income Tax (i.e., one of the couples must currently earn less than the £12,570 personal allowance for 2022-23).

The allowance works by permitting the lower earning partner to transfer up to £1,260 of their personal tax-free allowance to their spouse or civil partner. The marriage allowance can only be used when the recipient of the transfer (the higher earning partner) doesn’t pay more than the basic 20% rate of Income Tax. This would usually mean that their income is between £12,570 to £50,270 in 2022-23. The limits are somewhat different for those living in Scotland.

This could result in a saving of up to £252 for the recipient (20% of £1,260), or £21 a month for the current tax year. In fact, even if a spouse or civil partner has died since 5 April 2018, the surviving person can still claim the allowance (if they qualify) by contacting HMRC’s Income Tax helpline.

If you meet the eligibility requirements and have not yet claimed the allowance, you can backdate your claim to 6 April 2017. This could result in a total tax-break of up to £1,242 if you can claim for 2018-19, 2019-20, 2020-21, 2021-22 as well as the current 2022-23 tax year. 

Using Advisory Fuel rates

The easiest way to ensure that no car-fuel benefit charge (for private journeys in a company car) is payable, is to use the advisory fuel rates published by HMRC to repay any private fuel costs to your employer. The advisory fuel rates are intended to reflect actual average fuel costs and are updated quarterly.

However, the car-fuel benefit charge will still be payable if it cannot be demonstrated to HMRC that the driver of the car has paid for all fuel used for private journeys, this includes commuting to and from work. To ensure that this does not occur, employees will need to keep a log of private mileage.

The latest advisory fuel rates became effective on 1 June 2022 and the next set will take effect on 1 September 2022. Fuel rates are reviewed four times a year with changes taking effect on 1 March, 1 June, 1 September and 1 December. You can use the previous rates for up to 1 month from the date the new rates apply.

If you have a company car and your employer pays for all your petrol you will need to work out your actual private mileage for 2022-23, multiply this by the appropriate advisory fuel rate, and pay this amount to your employer.

This will avoid being charged the expensive car-fuel benefit – in many cases the tax saved will be more than the amount of your repayment to the employer.

Tax relief on replacement of domestic items

The replacement of domestic items relief has been in place since April 2016. The relief allows landlords the ability to claim tax relief when they replace movable furniture, furnishings, household appliances and kitchenware in a rental property. The allowance is available for the cost of domestic items such as free- standing wardrobes, curtains, carpets, televisions, fridges and crockery.

The amount of the deduction is based on:

  • the cost of the new replacement item, limited to the cost of an equivalent item if it represents an improvement on the old item (beyond the reasonable modern equivalent), plus
  • the incidental costs of disposing of the old item or acquiring the replacement,
  • less any amounts received on disposal of the old item.

There is an important distinction to note if deciding if a new item represents a replacement or an improvement. Where the new item is an improvement on the old item the allowable deduction is limited to the cost of purchasing an equivalent of the original item.

HMRC’s internal guidance provides an example highlighting the fact that a brand new budget washing machine costing circa £200 is not an improvement over a 5 year old washing machine that cost around £200 at the time of purchase (or slightly less, taking into account inflation).

Also, if a replacement item is for a reasonable modern equivalent for example a new energy efficient fridge replacing an old fridge this is not considered an improvement and the full cost of the new item is eligible for relief.

Business records if self-employed

If you are self-employed as a sole trader or as a partner in a business partnership, then you must keep suitable business records as well as separate personal records of your income. 

For tax purposes, the business records must be held for at least 5 years from the 31 January submission deadline for the relevant tax year. For example, for the 2020-21 tax year where online filing was due by 31 January 2022 you must keep your records until at least the end of January 2027. In certain situations, such as when a return is submitted late, the records must be held for longer. 

If you are self-employed, you should also keep a record of:

  • all sales and income
  • all business expenses
  • VAT records if you’re registered for VAT
  • PAYE records if you employ people
  • records about your personal income
  • grant details if you claimed through the Self-Employment Income Support Scheme because of coronavirus

You don't need to keep the vast majority of your records in their original form. If you prefer, you can keep a copy of most of them in an alternative format, as long as they can be recovered in a readable and uncorrupted format. For example, a scanned PDF document. 

If your records are no longer available for any reason, you must try and recreate them letting HMRC know if the figures are estimated or provisional. There are penalties for failing to keep proper records or for keeping inaccurate records. 

Applying for Marriage Allowance

The marriage allowance can be claimed by married couples and those in a civil partnership where a spouse or civil partner does not pay tax or does not pay tax above the basic rate threshold for Income Tax (i.e., one of the couples must currently earn less than the £12,570 personal allowance for 2022-23).

The allowance works by permitting the lower earning partner to transfer up to £1,260 of their personal tax-free allowance to their spouse or civil partner. The marriage allowance can only be used when the recipient of the transfer (the higher earning partner) does not pay tax at the higher Income Tax rates. This would usually mean that their income is between £12,570 to £50,270 in 2022-23. The limits are somewhat different for those living in Scotland.

This transfer of unused allowances could result in a saving of up to £252 for the recipient (20% of £1,260), or £21 a month for the current tax year.

If you meet the eligibility requirements and have not yet claimed the allowance, you can backdate your claim to 6 April 2018. This could result in a total tax refund of up to £1,220 if you can claim for 2018-19, 2019-20, 2020-21, 2021-22 as well as the current 2022-23 tax year. If you claim now, you can backdate your claim for four years (if eligible) as well as for the current tax year. In fact, even if you are no longer eligible but would have been in all or any of the preceding years then you can still claim your entitlement.

Joining the MTD ITSA pilot

Some businesses and agents are already keeping digital records and providing updates to HMRC as part of a live pilot to test and develop the Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA). Under the pilot, qualifying landlords and sole traders (or their agents) can use software to keep digital records and send Income Tax updates instead of filing a Self-Assessment tax return.

The full introduction of MTD for ITSA is expected to start from 6 April 2024. The rules will initially apply to taxpayers who file ITSA returns with business or property income over £10,000 annually. General partnerships will not be required to join MTD for ITSA until a year later, in April 2025. A new system of penalties for the late filing and late payment of tax for ITSA will also apply. 

HMRC’s guidance on who can use the pilot has been updated. We have listed the main categories of who can and can’t join the pilot below:

You can voluntarily sign up for the service if all of the following apply:

  • you’re a UK resident,
  • you’re already registered for Self Assessment,
  • your accounting period aligns to the tax year — for example, 6 April 2021 to 5 April 2022,
  • you have submitted at least one Self Assessment tax return,
  • you’re keeping digital records,
  • one or more of the following were included in your last return: an existing self-employment income, a UK property source, a foreign property source.
  • you’re up to date with your tax records — for example, you have no outstanding tax liabilities.

You cannot sign up yet if you:

  • need to report income from any other sources,
  • have an Income Tax charge — for example, high income Child Benefit charges or certain pension tax charges,
  • have a payment arrangement,
  • do not have an up to date address with HMRC,
  • are a partner in a partnership,
  • are currently, or are going to be, bankrupt or insolvent,
  • are a Minister of religion, Lloyds underwriter or foster carer,
  • have a third party capacitor, this includes (but is not limited to): trusted helpers, insolvency practitioners, nominees and solicitors.

The option to sign-up as an individual for MTD for ITSA is currently only available to individuals using a recognised provider offering software that is compatible with MTD for ITSA.