Overview of the current system
H M Revenue & Customs (HMRC) routinely receives details regarding taxable income about taxpayers from various sources. These sources will include for example, taxable amounts received from employers for wages and salaries (P60) and benefits (P11D), state pension and state benefits from the DWP, other pensions from private pension and life insurance companies and bank and building society interest.
With the above details of taxable income, so long as it is a complete list of all their taxable income, HMRC can work out what tax is payable. HMRC usually does this several months after the end of the tax year, around September each year. HMRC may send a tax calculation, form P800, and then sends a refund or asks for additional tax. This system only works where HMRC already has details of all sources of taxable income received by the taxpayer.
Where a taxpayer has other sources of income that has not automatically been sent to HMRC then the taxpayer must generally complete a Self Assessment tax return each year. The tax return will provide details of untaxed income, that HMRC will not have details of, e.g. from self-employment, income from property rental and capital gains.
Generally speaking, employees pay their tax through a system known as the PAYE (Pay As You Earn). Through the use of a tax code they pay tax on their employment income as they earn it. For most employed people their tax code equates to their annual personal allowance. In 2017-18, the personal allowance is £11,500 and this results in a tax code of 1150.
The tax code can also be used by companies that pay private and occupational pensions to people. The state pension is always paid gross and is never taxed at source by the Government (DWP).
Certain people, e.g. pensioners may receive state pension in excess of the personal allowance. As they have no employer then they cannot have their pension taxed at source through PAYE. These people currently must prepare a tax return each year under the Self Assessment system in order to calculate and pay the tax due.
What is Simple Assessment?
Currently, around 11 million people have to complete a tax return every year to provide HMRC with information about their taxable income. With greater use of existing data, HMRC can now find some of this information for some taxpayers elsewhere without needing them to complete a Tax Return. This new system is called Simple Assessment.
Simple Assessment is a new way of collecting tax that will make life easier for millions of taxpayers who have previously had to prepare a Self Assessment tax return.
Simple Assessment sounds very similar to Self Assessment, but the two systems are completely different.
Self Assessment is the system where a taxpayer completes a Tax Return. The taxpayer includes on their tax return details of all sources and amounts of taxable income.
Under Simple Assessment HMRC already has all the details that they need to calculate the tax due. HMRC can therefore send a taxpayer a tax bill or a tax refund as necessary. This will normally happen after September following the end of the tax year on 5 April.
It should be remembered that under the Self Assessment system that a taxpayer must still fully complete their tax return with all sources of their income, even those that HMRC are already aware of e.g. salary, state and private pensions and bank and building society interest. In due course, through the Making Tax Digital (MTD) project, taxpayers will have this type of income already received by HMRC prepopulated into their annual tax account. This should make the annual tax declaration process quicker.
The HMRC guidance insinuates that Simple Assessment is ‘ending the tax return’, which is simply not true. It can be argued that HMRC is promoting the myth that taxpayers have been released from their obligations to tell them of their full and correct taxable income and gains.
It is important that taxpayers must report new sources of income or gains and should check the Simple Assessment for omissions. It is not uncommon for third party provider e.g. DWP, employers and pension providers to report the incorrect details of income to HMRC. From our experience, more errors tend to originate from the DWP than other providers.
What is changing?
From September 2017 HMRC will remove the need for some taxpayers to complete a tax return, starting with two groups:
• New state pensioners with income more than the personal tax allowance in the tax year 2016-2017 • PAYE taxpayers who have underpaid tax and who cannot have that tax collected through their tax code.
All existing state pensioners who complete a tax return because their state pension is more than their personal allowance will be removed from Self Assessment in the tax year 2018-19.
Taxpayer with more complex tax affairs will continue preparing Self Assessment Tax Return, but will benefit from a modernised process in the future. Taxpayer will only be asked for information needed to calculate their tax. HMRC will complete the rest of the information automatically.
New PA302 form
Taxpayers that do not complete tax returns, and who either owe tax or are due a tax refund, should receive a P800 form. This summarises their taxable income e.g. from salary and benefits in kind, pensions and bank interest. Strictly, the P800 is an informative document and not a legal notification to pay tax.
Taxpayers that complete a tax return sometimes receive an SA302 Tax Calculation. This tax calculation is available to print or save once the Self Assessment Tax Return has been prepared online. Therefore, an SA302 Tax Calculation is generally not posted to the taxpayer. Mortgage providers often ask for an SA302 Tax Calculation as proof of a person's income.
Under Simple Assessment a new form PA302 will be physically posted to the taxpayer. It is essentially a tax calculation, but from a legal tax point it is also a notification to pay tax.
Taxpayers just need to check the information is correct, and if it is they can pay their tax by the deadline shown in the form. If a taxpayer thinks any information is incorrect they have 60 days to contact HMRC.
Most people involved under Simple Assessment will be unrepresented i.e. will not have an accountant or tax adviser. There has long been a problem with unrepresented taxpayers not understanding their obligation to notify HMRC about the sources of their income. The best advice that we can give to these people is to fully check the SA302 or P800 tax calculations and ensure that the details of taxable income are both fully disclosed and accurate. They should check their income to P60s, pension statements and to bank and building society passbooks and statement.
Tax due dates
A tax underpayment shown on a P800 is due immediately. However, if the amount is under £3,000 then it should be collected through PAYE by reducing the tax code and therefore paying more tax each pay period.
The underpayment demanded under both Self Assessment and Simple Assessment is due by 31 January following the tax year end, so by 31 January 2018 for the 2016/17 tax year.
Personal Tax Accounts
HMRC are encouraging all taxpayers to set up their personal tax accounts. This allows a taxpayer to complete their tax return; review their taxable income from employers, private pensions and bank interest etc; request tax refunds and review their tax codes. See our previous blog article on Personal Tax Account.