Using the Gift Aid scheme

The Gift Aid scheme is available to all UK taxpayers. The charity or Community Amateur Sports Clubs (CASC) concerned can take your donation and, provided all the qualifying conditions are met, reclaim the basic rate tax allowing for an extra 25p of tax relief on every pound donated to charity.

If you are a higher rate or additional rate taxpayer, you are eligible to claim additional tax relief on the difference between the basic rate and your highest rate of tax.

For example:

If you donated £5,000 to charity, the total value of the donation to the charity is £6,250. You can claim back additional tax of:

  • £1,250 if you pay tax at the higher rate of 40% (£6,250 × 20%),
  • £1,562.50 if you pay tax at the additional rate of 45% (£6,250 × 25%).

If you are a higher rate or additional rate taxpayer, you have the option to carry back your charitable donations to the previous tax year. A request to carry back the donation must be made before or at the same time as your previous year’s Self-Assessment return is completed.

This means that if you made a gift to charity in the current 2022-23 tax year – that ends on 5 April 2023 – you can accelerate repayment of any tax associated with your charitable giving. This can be a useful strategy to maximise tax relief if you will not pay higher rate tax in the current tax year but did in the previous tax year. This should be done as part of the Self-Assessment tax return for 2021-22 which must be submitted by 31 January 2023.

You can only claim if your donations qualify for gift aid. This means that your donations from both tax years together must not be more than 4 times what you paid in tax in the previous year. If you do not complete a tax return you need to use a P810 form to make a claim.

Did you file your tax return on Christmas Day?

A new press release by HMRC has highlighted the fact that 3,275 taxpayers took the time to file their tax return online on Christmas Day with a further 10,311 taxpayers completing their tax returns on Boxing Day. In total, 22,060 Self-Assessment returns were filed between 24 and 26 December. The total number of submissions for the period were actually less than last year. 

HMRC’s Director General for Customer Services, said:

‘We are grateful to those customers who have already filed their tax returns. For anyone who is yet to make a start, help is available on GOV.UK, just search ‘Self-Assessment’ to find out more.’

If you are filing online for the first time you should ensure that you register to use HMRC’s Self-Assessment online service as soon as possible. Once registered an activation code will be sent by mail. This process can take up to 10 working days. 

We would encourage our readers to complete their tax return as early as possible to avoid last-minute stress as the 31 January 2023 filing date looms. Last year over 2.3 million taxpayers or 19% of those required to file missed the 31 January deadline.

If you miss the filing deadline then you will be charged a £100 fixed penalty (unless you have a reasonable excuse) which applies even if there is no tax to pay, or if the tax due is paid on time. There are further penalties for late tax returns still outstanding 3 months, 6 months and 12 months after the deadline. There are also additional penalties for late payment amounting to 5% of the tax unpaid at 30 days, 6 months and 12 months.

Are you ready for 31 January 2023?

The deadline date to file your 2021-22 Self-Assessment tax return is fast approaching. Last year over 12.5 million taxpayers were required to complete a Self-Assessment tax return but over 2.3 million taxpayers missed the 31 January deadline.

The deadline for submitting your 2021-22 Self-Assessment tax returns online is 31 January 2023. You should also be aware that payment of any tax due should also be made by this date. This includes the payment of any balance of Self-Assessment liability for the 2021-22 plus the first payment on account due for the current 2022-23 tax year.

If you miss the filing deadline you will usually be charged a £100 fixed penalty which applies even if there is no tax to pay or if the tax due is paid on time. If you do not file and pay before 1 May 2023 then you will face additional daily penalties of £10 per day, up to a maximum of £900. If the return still remains outstanding further higher penalties will be charged after six months and again after twelve months from the filing date. There are also additional penalties for paying late that amount to 5% of the tax unpaid at 30 days, 6 months and 12 months.

If you had tax underpayments in the 2021-22 tax year you have until 30 December 2022 to file your online Self-Assessment returns in order to have the monies collected in the 2023-24 tax year starting on 6 April 2023.

We would encourage you to complete your tax return as early as possible as the filing date looms. If you are filing online for the first time you should ensure you register to use HMRC’s Self-Assessment online service. Once registered an activation code will be sent by mail. This process can take up to 10 working days. 

Digitisation of tax postponed

A statement was made by the Financial Secretary to the Treasury on 19 December 2022. It confirmed that the roll-out of Making Tax Digital for Income Tax, due to commence April 2024, is being delayed. The statement says:

Across the globe, digitalisation of tax is increasingly the norm. Modernisation of UK businesses and the tax system remains of crucial importance to the UK.

Making Tax Digital (MTD) for VAT is already demonstrating the benefits to businesses that digital ways of working can bring.

MTD for Income Tax Self-Assessment (ITSA) will follow, with businesses, self-employed individuals, and landlords keeping digital records and using MTD-compatible software to submit updates to HM Revenue and Customs.

The government understands businesses and self-employed individuals are currently facing a challenging economic environment, and that the transition to MTD for ITSA represents a significant change for taxpayers, their agents, and for HMRC.

That means it is right to take the time needed to work together to maximise those benefits of MTD for small business by implementing gradually.

The government is therefore announcing more time to prepare, so that all businesses, self-employed individuals, and landlords within scope of MTD for Income Tax, but particularly those with the smallest incomes, can adapt to the new ways of working.

The mandation of MTD for ITSA will now be introduced from April 2026, with businesses, self-employed individuals, and landlords with income over £50,000 mandated to join first.

Those with income over £30,000 will be mandated from April 2027.

The government will now review the needs of smaller businesses, and particularly those under the £30,000 threshold. This will look in detail at whether and how the MTD for ITSA service can be shaped to meet the needs of smaller businesses and the best way for them to fulfil their Income Tax obligations. Once that review is complete – and in consultation with businesses, taxpayers, agents, and others – the government will lay out the plans for any further mandation of MTD for ITSA.

Following the phased approach, the government will not extend MTD for ITSA to general partnerships in 2025. It remains committed to introducing MTD for ITSA to partnerships at a later date.

The new penalty system, harmonising late submission and late payment penalties for Income Tax Self-Assessment with those for VAT, will come into effect for taxpayers when they become mandated to join MTD. This makes penalties fairer and simpler for taxpayers. The government will introduce the new penalty system for Income Tax Self-Assessment taxpayers outside the scope of MTD after its introduction for MTD taxpayers.

The government anticipates that most taxpayers within the scope of MTD for ITSA will be able to sign-up voluntarily before they are mandated to do so. HMRC will keep this under review to ensure all taxpayers using the MTD for ITSA service receive a high-quality service.

Using the HMRC app to make Self-Assessment tax payments

A new press release from HMRC has revealed that more than 50,000 taxpayers have used the HMRC app to make Self-Assessment tax payments since February 2022. Payments can be made safely and securely through the app. In October alone, more than 6,700 Self-Assessment taxpayers paid almost £5.9 million in tax via the HMRC app, compared to around 2,500 customers in February 2022, who paid £1.8 million.

Commenting on the payments, HMRC’s Director General for Customer Services, said:

'We’re seeing more and more people embrace the convenience and flexibility the HMRC app offers. Self-Assessment customers can pay the tax owed through the HMRC app, which is a secure and convenient tool that can be used at a time and place to suit them.'

The free HMRC tax app is available to download from the App Store for iOS and from the Google Play Store for Android. 

The app can also be used to complete a number of other tasks that include:

  • to renew and report changes to your tax credits;
  • access your Help to Save account;
  • using HMRC’s tax calculator to work out your take home pay after Income Tax and National Insurance deductions;
  • track forms and letters you’ve sent to us;
  • claim a refund if you’ve paid too much tax; and
  • update your postal address.

Collecting tax from wealthy taxpayers

An updated briefing which looks at how HMRC deals with wealthy individuals has been published. The briefing looks at helping wealthy individuals to comply with their tax obligations and also what happens to those who don’t play by the rules. According to HMRC, the High-Risk Wealth Programme (HRWP) aims to accelerate the resolution of some of the most complex and high-risk cases within the wealthy customer group.

HMRC defines individuals as ‘wealthy’ if they have incomes of £200,000 or more, or assets equal to or above £2 million in any of the last 3 years. According to HMRC, there are approximately 800,000 wealthy taxpayers. HMRC uses details from tax returns and other public information databases to identify links between people, organisations, assets and income.

Wealthy customers are managed by the Wealthy Team within HMRC’s Customer Compliance Group. The team applies a proactive and co-operative approach, taking into account the unique nature of this customer group’s tax affairs.

According to HMRC, wealthy individuals may present a higher risk of error than other customers as the amounts involved are greater also because they may have investments in more than one country, making their financial affairs more complex. 

The Wealthy Team also works with colleagues across HMRC, including Fraud Investigation Service and Counter-Avoidance, handling marketed avoidance schemes and offshore disclosure. This means that HMRC can see a taxpayer's past history including involvement in a tax planning scheme or the use of offshore bank accounts and use this information to help identify taxpayers for further investigation.

The Rent a Room Scheme

The rent-a-room scheme is designed to help homeowners who rent-a-room in their home. If you are using this scheme, you should ensure that rents received from lodgers during the current tax year do not exceed £7,500. The tax exemption is automatic and if you earn less than £7,500 there are no specific tax reporting requirements. If required, homeowners can opt out of the scheme and record property income and expenses as usual.

The relief only applies to the letting of furnished accommodation and is available when a bedroom is rented out to a lodger by homeowners. The relief also simplifies the tax and administrative burden for those with rent-a-room income of up to £7,500. The limit is reduced by half if the income from letting accommodation in the same property is shared by a joint owner of the property.

The rent-a-room limit includes any amounts received for meals, goods and services provided, such as cleaning or laundry. If gross receipts are more than the limit, taxpayers can choose between paying tax on the actual profit (gross rents minus actual expenses and capital allowances) or the gross receipts (and any balancing charges) minus the allowance – with no deduction for expenses or capital allowances.

Who is a Scottish taxpayer?

The Scottish rate of income (SRIT) is payable on the non-savings and non-dividend income of those defined as Scottish taxpayers. This means that Scottish taxpayers who also have savings and dividend income need to consider the UK rates as well as the Scottish rates when calculating their income tax bill.

Scottish taxpayer status applies for a whole tax year. It is not possible to be a Scottish taxpayer for part of a tax year. The definition of a Scottish taxpayer is generally focused on the question of whether the taxpayer has a 'close connection' with Scotland or elsewhere in the UK. The idea of being treated as a Scottish taxpayer is not based on nationalist identity, location of work or the source of a person’s income e.g., receiving a salary from a Scottish business.

For the vast majority of individuals, the question of whether or not they are defined as a Scottish taxpayer is a simple one – they either live in Scotland and are a Scottish taxpayer or live elsewhere in the UK and are not a Scottish taxpayer.

More specifically, an individual will generally be defined a Scottish taxpayer if they satisfy any of the following tests:

  1. They are a Scottish Parliamentarian.
  2. They have a 'close connection' to Scotland, through either:
    i) having only a single 'place of residence', which is in Scotland; or
    ii) where they have more than one 'place of residence', having their 'main place of residence' in Scotland for at least as much of the tax year as it has been in any one other part of the UK.
  3. Where no 'close connection' to Scotland (or any other part of the UK) exists (either through it not being possible to identify any place of residence or a main residence) – then place of residence will be decided by day counting.

There will always be cases where a taxpayer's status is not so clear cut. HMRC’s technical guidance looks at relevant case law and includes examples where a taxpayer has more than one residence either side of the border.

Self-assessment payments on account

Self-assessment taxpayers are usually required to pay their income tax liabilities in three instalments each year. The first two payments are due on:

  • 31 January during the tax year e.g. for 2022-23 the first payment on account is due on 31 January 2023.
  • 31 July following the tax year e.g. for 2022-23 the second payment on account is due on 31 July 2023.

These payments on account are based on 50% each of the previous year’s net income tax liability. In addition, the third (or only) payment of tax will be due on 31 January following the end of the tax year.

There is no requirement to make payments on account where your net Income Tax liability for the previous tax year is less than £1,000 or if more than 80% of that year’s tax liability has been collected at source.

The payments are based on 50% of your previous year’s net Income Tax liability. If you think that your income for the next tax year will be lower than the previous tax year, you can apply to have your payment on account reduced. This can be done using HMRC’s online service or by completing form SA303.

HMRC’s internal manuals are clear that a reason for requesting a reduction in the payments on account must be given. A request without a reason is not a valid claim.

There are no restrictions on the number of claims to adjust payments on account a taxpayer or agent can make. However, there is a time limit which means that the claim must be received before the 31 January following the tax year in question. There is no requirement to notify HMRC if your taxable profits have increased year on year.

Personal tax allowances frozen to April 2028

Chancellor Jeremy Hunt announced as part of the Autumn Statement measures that the Income Tax thresholds will be maintained at their current levels for a further two years until April 2028. This will see the personal tax allowance frozen at £12,570 through to April 2028. The existing thresholds for the basic rate and higher rates of tax have also been frozen.

In addition, the Income Tax additional rate threshold will be reduced from £150,000 to £125,140 with effect from 6 April 2023. This means that from April 2023, the higher rate 40% Income Tax will apply to those with taxable income between £37,701 to £125,140 and the additional rate 45% Income Tax will apply to those with taxable income over £125,140.

Taken together this means that more taxpayers will be pushed into paying higher taxes as income increases at a far faster rate than the frozen tax bands. This phenomenon is known as fiscal drag. The freezing of most of the Income Tax allowance and rates at current levels until 2028 means that many taxpayers will pay more Income Tax as their income increases with no corresponding increases in their allowances.

This change could also see more taxpayers having their taxable income boosted into the 40%, or 45%, Income Tax bands. It has been estimated that 250,000 taxpayers will be paying the additional rate of Income Tax of 45% from next April.

In order to reduce the impact of these changes’ taxpayers may be advised to consider taking future increases in earnings in a tax-free format, for example as additional pension contributions.

Regional variations to Income Tax rates currently apply in Scotland and the 2023-24 Scottish Budget is set to be published on 15 December 2022.