Don’t fall into the Tory tax return trap

Seven common mistakes and how to avoid them. By Mike Warburton and Charlotte Gifford

Thousands of workers, savers, parents and pensioners will be forced to file a tax return for the first time this year. Frozen thresholds combined with rising incomes means more are being dragged into higher tax rates, necessitating the annual admin chore.

However, a complex web of rules and an ongoing customer service shambles at HM Revenue and Customs means many could end up with a penalty if they make even an innocent mistake.

The Chancellor’s deep freeze on tax thresholds means many modest earners will now be forced to complete a self-assessment tax return for claiming child benefit for instance, while boosted interest rates means many will have to file one to pay tax on returns for savings. Indeed, if you earned enough income from self-employment, property, savings or investments in the past tax year, then you will have to grapple with HMRC’s tedious self-assessment system.

On top of this, freelancers must grapple with complex changes to when their “business year” ends ( see p.6). It comes as the tax office grapples with a sharp decline in customer service, with its self-assessment phone line closed for three months over the summer.

The Association of Taxation Technicians, a professional body, has warned that HMRC is “putting obstacles” in the way of people trying to file their tax returns early, by pushing taxpayers to use its online services rather than call the helpline for support.

MPs wrote to the head of HMRC in January expressing “serious concerns” that its generous work-from-home policy was causing taxpayers to be left waiting on the phone in the run-up to the self-assessment deadline, a charge it has repeatedly rejected.

Taxpayers calling HMRC for help can expect to wait 23 minutes on average before a tax adviser answers the phone, according to the latest data.

If taxpayers fail to submit their return by the Jan 31 deadline they are fined £ 100 in the first three months. This penalty rises to £300 or 5pc of the tax due – whichever is higher – if the tax return is more than 12 months late. Among those who may not realise they are now expected to fill out a tax return include parents who claim child benefit but one of them earns more than £50,000 a year.

Savers also need to register for selfassessment if income from savings or investments exceeds £10,000 over the 2022-23 tax year.

Those who rent a property out to earn extra income or those who earn more than £1,000 a year from selling goods online also have to fill out a return.

HMRC has now scrapped the requirement for workers earning more than £100,000 to file a tax return.

However, these changes apply from next April. And so if you earned more than £ 100,000 in the past tax year, you will still need to go through self-assessment.

Even when this change kicks in, many high earners will still have to submit a tax return as HMRC continues to raid savings and investments. Here, Telegraph Money explains some of the peculiar rules and quirks that could catch you out.

DON’T FORGET TO REPORT PROPERTY GAINS … AGAIN If you made a taxable gain on residential property which incurs capital gains tax (CGT) then it should have been reported to HMRC online within 60 days of completion. If you had problems with the system, you may have resorted to reporting by letter or on a CGT on UK Property form, also known as a PPDCGT form. Confusingly, this system operates independently of self-assessment so you must now repeat the information in the capital gains tax section of the return. Taxpayers must then hope HMRC will match it up with the payment made.

AVOID FALLING INTO

A TRUST TAX TRAP A similar problem can arise if you are the beneficiary of a trust. Depending on the type of trust you may have to declare the income or gains on your self-assessment return. However, you may be able to claim a repayment where the trustees have paid tax. If you are in this position, it is worth checking the HMRC guidance.

HIGHER EARNERS SHOULD CLAIM FULL PENSION RELIEF

ALLOWANCE Pension contributions to a self-invested personal pension (Sipp), are made with basic- rate income tax relief given at source, but you will miss out on any higher- rate relief if you do not claim this on your return.

DOUBLE CHECK YOUR PENSION CONTRIBUTIONS The Chancellor scrapped the lifetime cap on tax- free pension savings this year, known as the “lifetime allowance”, but many taxpayers are being trapped by the lesser- known “annual allowance” tax charge, which remains in place. Although the allowance rose to £60,000 this April it was £40,000 a year for 2022-23, or equal to your salary,

whatever is lowest. With the additional complications of the high income allowance taper and carry forward exemptions for unused allowance, it is easy to calculate the wrong amount for your tax return.

REMEMBER PARENTAL BENEFIT IS NOT CHILD’S PLAY If you or your partner have claimed child benefit and your income was more than £50,000, it must be declared on your self-assessment return, unless your partner had higher income and reported it. Child benefit entitlement tapers off over this amount until £60,000, when it is lost altogether.

PAY TAX DUE ON YOUR COMPANY SHARES More people are benefiting from company share incentive schemes. Unless the scheme is a qualifying tax favoured scheme, there is a charge to income tax when you become beneficially entitled to the shares, based on the market value of those shares. This should be included as income. However, for shares in a listed company this will have been dealt with under their pay-asyou-earn system, usually with a sell to cover arrangement. In effect the share award is treated as a bonus with income tax and National Insurance applying on the share value less any payment you made for them.

Sufficient shares are then sold to reimburse your employer for the tax and NI. For your tax return you need to check that your P60 takes this bonus into account.

RECLAIM DOUBLE TAXES

ON OVERSEAS INCOME Foreign income can be complicated, particularly with dividends on shares where tax has been withheld overseas. Many overseas companies withhold tax at a higher rate than the reduced rate set under the relevant double taxation treaty. You can only claim relief at this reduced rate. You must make a separate reclaim from the overseas authority for the difference.