Income Tax

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

Higher rate and additional rate taxpayers are eligible to claim tax relief on the difference between the basic rate and their highest rate of tax. This can be actioned through their Self-Assessment tax return or by asking HMRC to amend their tax code.

For example:

If a taxpayer donates £500 to charity, the total value of the donation to the charity is £625. The taxpayer can claim additional tax back of:

• £125 if they pay tax at 40% (£625 × 20%),
• £156.25 if they pay tax at 45% (£625 × 20%) plus (£625 × 5%).

Taxpayers should be aware that one of the conditions of gaining tax relief is that you must have paid enough tax (or any tax) in the relevant tax year. The rules state that your donations will qualify for tax relief as long as you have not claimed more than 4 times what you have paid in tax in that tax year. If you have claimed more tax relief than you are entitled to you will need to notify the charity and pay back any excess tax relief to HMRC.

The 2021-22 tax return deadline for taxpayers who continue to submit paper Self-Assessment returns is 31 October 2022. Late submission of a Self-Assessment return will become liable to a £100 late filing penalty. The penalty usually applies even if there is no liability or if any tax due is paid in full by 31 January 2023.

We would recommend that anyone still submitting paper tax returns consider the benefits of submitting the returns electronically and benefit from an additional three months (until 31 January 2023) in which to submit a return.

Taxpayers with certain underpayments in the 2021-22 tax year can elect to have this amount collected via their tax code (in 2023-24), provided they are in employment or in receipt of a UK-based pension. The coding applies to certain debts and the amount of debt that can be coded out ranges from £3,000 to £17,000 based on a graduated scale. The maximum coding out allowance only applies to taxpayers with earnings exceeding £90,000.

Daily penalties of £10 per day will also take effect if the tax return is still outstanding three months after the filing date up to a maximum of £900. If the return still remains outstanding, further higher penalties will be charged from six months and twelve months late.

Taxpayers that received a letter informing them that they have to submit a paper return after 30 July 2022 have an extended deadline which runs for three months from the date they received the letter to submit a paper return.

A jeopardy amendment can be made to a taxpayer’s Self-Assessment return as part of an S9A general enquiry. A jeopardy amendment should only be made where an HMRC officer believes there is an imminent risk of a loss of tax to the Crown unless the assessment is amended at once. i.e., the tax due is in jeopardy. For example, the officer may become aware that the taxpayer has plans to leave the country or is disposing of assets.

A jeopardy amendment may be made where:

• The taxpayer type is individual or trust.
• There is an open S9A enquiry.
• The enquiry produces evidence indicating that the Self-Assessment is inadequate.

and,

• There is reason to believe that the failure to make a payment on account of the additional liability could result in a loss of tax.

HMRC manuals are clear that this is not a routine procedure. HMRC should only make a jeopardy amendment where there is a real risk of the loss of substantial amounts of tax.

A stand over can be used to postpone certain Self-Assessment payments due to HMRC. There are two types of stand over payments, a formal stand over and an informal stand over.

A formal stand over is used to stand over any Self-Assessment charge against which a postponement application may legally be made.

Formal stand overs may be made against SA charges arising from a:

• Revenue assessment
• Revenue amendment
• Jeopardy amendment

There is no legal right to formally postpone charges arising from

• Penalties
• Surcharge
• Interest

An informal stand over can be used to postpone collection of a charge in order to ensure that a payment is set against another charge on the taxpayer’s Self-Assessment record. An informal stand over should not be used if it is possible to formally stand over all or part of the charge. An informal stand over need not be accompanied by an appeal.

The Scottish rate of income tax (SRIT) is payable on the non-savings and non-dividend income of those defined as Scottish taxpayers.

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 liability to SRIT 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.

HMRC’s guidance states that for the vast majority of individuals, the question of whether or not they are a Scottish taxpayer will be a simple one – they will either live in Scotland and thus be a Scottish taxpayer or live elsewhere in the UK and not be a Scottish taxpayer. 

If a taxpayer moves to or from Scotland from elsewhere in the UK, then their tax liability for the tax year in question will be based on where they spent the most time in the relevant tax year. Scottish taxpayer status applies for a whole tax year. It is not possible to be a Scottish taxpayer for part of a tax year.

You may also pay Scottish Income Tax if you live in a home in Scotland and also have a home elsewhere in the UK. In this case, you need to identify which is your main home based on published guidance and the facts on the ground. You may also be liable to SRIT if you do not have a home and stay in Scotland regularly, for example you stay offshore or in hotels.

The Scottish rates and bands for 2022-23 are as follows:

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.

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

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.

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.

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.