Income Tax

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.

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.

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.

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.

The introduction of Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) is set to commence from April 2024. This means that clients who have not yet prepared for the change have less than 18 months to choose and begin using approved software.

MTD for ITSA will fundamentally change the way businesses, the self-employed and landlords, interact with HMRC. The regime will require businesses and individuals to register, file, pay and update their information using an online tax account. The rules will initially apply to taxpayers who file Income Tax Self-Assessment tax 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. The date other types of partnerships will be required to join will be confirmed in the future. A new system of penalties for the late filing and late payment of tax for ITSA will be aligned with the introduction of MTD for ITSA.

The MTD regime started in April 2019 for VAT purposes when businesses with a turnover above the VAT threshold were mandated to keep their records digitally and provide their VAT return information to HMRC using MTD compatible software. Since April 2022, MTD has been extended to all VAT registered businesses with turnover below the VAT threshold of £85,000.

Businesses and self-employed people in financial distress, and with outstanding tax liabilities, may be eligible to receive support with their tax affairs through HMRC’s Time To Pay service.

An online payment plan for Self-Assessment tax bills can be used to set up instalment arrangements for paying tax liabilities up to £30,000. Taxpayers that qualify for a Time to Pay arrangement using the self-serve Time to Pay facility online, can do so without speaking to an HMRC adviser. The service will create a bespoke monthly payment plan based on how much tax is owed and the length of time needed to pay. The service was used by over 142,000 taxpayers for the 2021-22 tax year to spread the cost of over £475m in tax.

Taxpayers that want to use the online option for their 2021-22 tax return must meet the following requirements:

• have filed their tax return for the 2021-22 tax year;
• owe less than £30,000;
• plan to pay their debt off within the next 12 months or less.

Taxpayers with Self-Assessment tax payments that do not meet the above requirements need to contact HMRC to request a Time To Pay arrangement. These arrangements are agreed on a case-by-case basis and are tailored to individual circumstances and liabilities.

HMRC will usually offer taxpayers the option of extra time to pay if they think they genuinely cannot pay in full now but will be able to pay in the near future. If HMRC do not think that more time will help, then they can require immediate payment of a tax bill and start enforcement action if payment is not forthcoming.

HMRC is reminding Self-Assessment taxpayers that they must declare COVID-19 grant and support payments in their tax return for the 2021-22 tax year.

Most COVID support scheme grants are treated as taxable income in the same way as other taxable receipts and need to be reported to HMRC. This means that if you received a taxable support payment during the 2021-22 this needs to be reported on your tax return. This applies to self-employed, partnerships and businesses.

Many of the grants fell into the previous tax year but more than 2.9 million people claimed at least one Self-Employment Income Support Scheme (SEISS) payment in the 2021-22. These grants are taxable and should be declared on tax returns for the 2021-22 tax year before the deadline on 31 January 2023.

The SEISS application and payment windows during the 2021-22 tax year were:

• SEISS 4: 22 April 2021 to 1 June 2021
• SEISS 5: 29 July 2021 to 30 September 2021

HMRC’s guidance is clear that whether or not any tax is paid will depend on the business profits of the grant recipient (taking into account the grant and other business income and expenditure under normal tax rules), any other taxable income they may have and their personal and any other allowances to which they are entitled.

HMRC also has the power to recover payments and charge penalties where claimants have made support grant claims to which they were not entitled. There is no requirement to report COVID welfare payments made by a council such as those that were made to help with council tax payments and housing benefit.

HMRC may be able to help those who are unable to pay their tax bill in full by arranging an affordable payment plan, known as a Time to Pay arrangement. Most taxpayers can apply online to make this arrangement.

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 has remain fixed at that level ever since.

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.

These figures include the 1.25% increase in dividend tax rates that came into effect on 6 April 2022 alongside the 1.25% increase in NIC contribution rates. H M Treasury has confirmed that the plan to cut dividend tax rates from April 2023 announced as part of the mini-budget measures has been cancelled.

It remains to be seen if any further changes to the way dividends are taxed will be announced as part of the Autumn Statement. It is possible that there could be further increases in the tax rates or a reduction in the tax-free dividend allowance.

Dividends that fall within your Personal Allowance do not count towards your dividend allowance and you may pay tax at more than one rate.

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 fill one in. 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 need to register by 5 October following the tax year in which you had the relevant dividend income.

There are now less than 2-months to file your 2021-22 Self-Assessment tax return electronically. 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 filing deadline.

The deadline for submitting your 2021-22 Self-Assessment tax returns online is 31 January 2023. The deadline for paper returns ended on 31 October 2022. You should also be aware that payment of any tax due should also be made by the 31 January 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 then you will usually be charged a £100 fixed penalty if your return is up to 3 months late, regardless of whether you owed tax or not. If you do not file and pay before 1 May 2023 then you will face further penalties unless you have made an arrangement to pay with HMRC.

HMRC is encouraging taxpayers to complete their tax return as early as possible to avoid getting more stressed as the filing date looms. Those who submit their returns early still have until 31 January 2023 to pay any tax due.

If you are filing online for the first time you should ensure 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. 

HMRC is reminding parents that they may be eligible for Tax-Free Childcare (TFC) to help pay for October half-term holiday clubs and wraparound care during the school terms.

The TFC scheme can help parents of children aged up to 11 years old (17 for those with certain disabilities). The TFC scheme helps support 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.’