Making Tax Digital (MTD) for individuals is centred around the Personal Tax Account (PTA) which already has many of the services needed by PAYE taxpayers. HMRC continues to improve and develop the PTA and in due course it will offer the full range of HMRC services to personal taxpayers, including some of those who are currently required to complete self assessment tax returns.
Current tax system for individuals not in self assessment
Individual taxpayers fall into two groups – some who are required to complete self assessment tax returns and a very much larger group whose tax affairs are dealt with wholly within the PAYE system (PAYE taxpayers). Individuals can and do move between the two groups as their circumstances change. Individuals who have income from self-employment or from property are regarded by HMRC as being businesses and should refer to the business section of this MTD hub.
Until the introduction of the Personal Tax Account there were almost no digital tax services available to PAYE taxpayers and the service was largely paper based. The key elements of the income tax system for PAYE taxpayers are tax codes issued by HMRC, reporting of income data by employers, pension providers and the Department of Work and Pensions and an annual reconciliation to check that the correct tax has been paid. The tax codes determine the PAYE deducted by employers and pension providers. HMRC checks each taxpayer’s PAYE record after the end of each tax year and contacts the taxpayer if there is an over or under payment of tax (a P800 calculation or PA302 simple assessment).
Other HMRC services for PAYE taxpayers include claims for employment expenses, claims for relief on donations to charity, claims for marriage allowance and blind persons allowance and claims for tax relief on pension contributions.
The PAYE system is also used to collect tax due on non-PAYE income where the amount received is below the threshold for filing a self assessment tax return. This applies to income from letting property of less than £2,500, sundry untaxed income (such as tips or commission) of less than £2,500, income from savings and investments of less than £10,000 and dividend income of less than £10,000. Taxpayers are obliged to notify HMRC of any untaxed income sources by 5 October following the end of the tax year but this requirement is not well understood, particularly by unrepresented taxpayers. Neither are taxpayers always sufficiently aware of the need to check their tax codes and annual PAYE tax calculations. The information held by HMRC is not always correct and HMRC often carries adjustments forward from an earlier tax year if the taxpayer does not provide updated figures.
MTD and what it means for individuals
The Personal Tax Account (PTA) gives taxpayers much more visibility of their tax records and access to online information, forms and services. Although the service is not yet fully developed it should be the first port of call for any individual who wishes to check their tax or transact with HMRC. Individuals who have income from self-employment or from property are regarded by HMRC as being businesses and access some digital services through their Business Tax Account.
As well as providing online services through the PTA there are a number of other initiatives that fall within the scope of the HMRC Making Tax Digital for Individuals project. These are: dynamic coding, simple assessment and pre-population.
In July 2017 HMRC started using data from employers and pension providers to update tax codes much more regularly; this is known as dynamic coding. This is expected to increase significantly the number of PAYE taxpayers who pay the correct amount of tax in-year and reduce the number of over and underpayments which are not identified until after the end of the tax year. Some underpayments will be collected much more quickly under this system but HMRC has indicated that it will consider applications for underpayments to be collected over a longer period where there is hardship.
In September 2017 HMRC starting issuing simple assessments. These assessments are sent to those who have underpaid PAYE for 2016/17 or a subsequent year where the underpayment cannot be collected by an adjustment to a tax code.
In previous years such taxpayers would have received a P800 tax calculation followed by one or more requests for voluntary payment. Taxpayers who did not pay voluntarily were put into self assessment and ran the risk of late filing penalties. Now they will instead receive a PA302 simple assessment which looks similar to a P800 tax calculation but is an enforceable assessment.
The second group to receive simple assessments is those who receive state pension above the tax free personal allowance where this is their only source of income. Such taxpayers were previously required to file a self assessment tax return; now they will instead receive a simple assessment.
Pre-population of data by HMRC
HMRC is using interest income data from banks and building societies for 2018/19 to:
- Populate PAYE income tax calculations (P800s and PA302 simple assessments) for 2018/19
- Determine tax codes for 2019/20 on the assumption that the amount received will not change significantly
- HMRC assumes that interest on joint accounts is shared equally between the joint account holders and will need to be advised where this is not the case, or an account is held on trust
- HMRC does not obtain interest income data from sources other than banks and building societies and needs to be advised of income from such sources
- Interest income data will not be used to populate 2018/19 self assessment (SA) tax returns or 2019/20 tax codes for taxpayers who are required to complete SA returns.
HMRC also provides a service that allows certain data elements to be pre-populated in commercial self assessment software. The data includes: information on employments, national insurance and claims to marriage allowance.
Some individual taxpayers who are currently within the self assessment regime are expected to be moved out of that system, in tranches. Their tax affairs will be dealt with in the PAYE system and the Personal Tax Account. HMRC conducted a review of its projects in early 2018 with a view to ensuring sufficient capacity to deal with Brexit related priorities. Following that review further development of the Personal Tax Account and other MTD for individuals projects have largely been put on hold.
HMRC is expected to consult before using any additional sources of third party data to pre-populate taxpayer records and before extending simple assessment to more complex cases. There is still uncertainty about how income tax reporting through MTD for business will fit together with the reporting of personal income. Currently the self-employed will find information and services are split between their personal and business tax accounts. It is likely to be some time before the objective for information to appear all in one place is met.
Agents do not have access to the information and services in the Personal Tax Account. It is very disappointing that the development of the PTA did not include agent access in the plans from the outset. HMRC has taken the first tentative steps to give agents the access they need to represent their clients but it is likely to be some time before the information and services in the PTA are available to agents.
ICAEW Know-How from the Tax Faculty
This guidance is created by the Tax Faculty, recognised internationally as a leading authority and source of expertise on taxation. The Faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.