When’s a simplification not so simple? When it’s HMRC’s £100,000 to £150,000 self-assessment threshold increase

The UK government’s significant change to the income threshold for self-assessment tax returns, moving it from £100,000 to £150,000, was made back on April 6th 2023 but it’s having ramifications right now, writes Richard Grant, senior manager at Chart Accountancy.

A welcome self-assessment change, on paper…

While any change to simplify the experience of interacting with the tax system is welcome -- on paper, some taxpayers are required to file a voluntary tax return even when they don’t meet the compulsory filing criteria.

For example, some taxpayers claim tax relief for their private pension contributions via self-assessment.

We have encountered various issues with the increase in self-assessment threshold, which actually does not simplify our experience or workload.

What is self-assessment?

Self-assessment is the system used by HMRC to collect income tax.

While most employees have their tax automatically deducted from their wages through Pay As You Earn (PAYE), self-assessment requires individuals with more complex tax affairs to report their income directly to HMRC.

This often includes contractors, and specifically those with income from self-employment, investments, property rentals, or those who earn over a certain threshold.

The previous threshold

Until 2023-24, anyone with an annual income of £100,000 or more was required to complete a self-assessment tax return. This threshold had been in place for several years, and it captured a wide range of taxpayers, including higher earners who might also have relatively straightforward tax situations.

For example, an employee earning £101,000 solely from their salary with no other income sources or significant deductions would still have to file a self-assessment tax return. This led to a large number of individuals needing to complete the process, adding administrative burdens on both the taxpayers and HMRC.

The new £150,000 self-assessment threshold

For the 2023 to 2024 tax year, the self-assessment threshold was increased to £150,000.

This change means that individuals who earn between £100,000 and £150,000 and have relatively simple tax affairs, no longer needed to file a self-assessment tax return, since April 6th 2023.

Be aware, the taxpayer must still complete a return if they are:

• In receipt of any untaxed income
• A partner in a business partnership
• Liable to the High Income Child Benefit Charge
• A self-employed individual and with gross income of over £1,000

Under the now underway 2024-25 tax year started (April 6th 2024), the income threshold to complete a tax return for PAYE-only taxpayers has been removed completely.

Why the change?

The government’s decision to raise the threshold is part of a broader effort to modernise the tax system and make it more efficient. By reducing the number of people required to complete self-assessment returns, the hope is HMRC can focus its resources on more complex cases, where there is a higher risk of errors or underpayment of taxes.

This change is also expected to reduce the administrative burden on taxpayers, particularly those who have traditionally had little to declare beyond their salary.

Inflation, realignment, issues

Moreover, the £100,000 threshold had not been updated for inflation or wage growth for many years, meaning that more and more people were being pulled into the self-assessment system simply due to rising incomes and static thresholds.

The increase to £150,000 is seen as a way to realign the self-assessment threshold with current economic realities, ensuring that only higher earners with potentially more complex tax affairs are required to file tax returns.

However, as mentioned at the top, we have encountered various issues with the change, which actually does not simplify our experience, as an accountancy firm serving contractors.

Delays

Specifically, HMRC is refusing to reopen the self-assessment when we request to file a voluntary tax return. This delays the taxpayer’s claim for their refund and puts them in a worse position, as they must then deal with the refund through the PAYE system, which is delayed. The PAYE system does not facilitate a tax calculation to be triggered by the taxpayer, leading to further delays in refunds. In contrast, voluntary filing of a self-assessment can allow the refund to be claimed earlier.

It is important to note that all voluntary returns should now be treated as having been made in response to a ‘Notice to File,’ which was given to the person on the same date the return was received by HMRC.

Reluctance

However, we have noticed that HMRC is reluctant to reopen and accept the voluntary self-assessment under their own guidelines (SAM121140). We have been asked to submit SA1 forms, which can take up to five weeks to re-register clients in the self-assessment system to file a voluntary tax return.

Additionally, some taxpayers are accustomed to filing a return and prefer to settle their tax shortly after the end of the tax year. But in some cases, HMRC has closed the taxpayer’s self-assessment filing obligation due to now being the new £150,000 threshold, and they are then asked to wait until the PAYE office issues the tax reconciliation statement, which can take until after the end of the tax year to arrive. If the taxpayer’s position results in a tax refund and the self-assessment notice is not issued by HMRC, the refund is placed on hold.

More work for contractor accountants

As such, we do not find that the new, ‘simplified’ system simplifies dealings between taxpayers and their agents with HMRC. Instead, it results in delays and additional work to resolve our contractor clients’ tax affairs.

The increase in the self-assessment threshold from £100,000 to £150,000 seems to be a benefit for some taxpayers – on the face of it, but with all changes there are potentially unforeseen circumstances and for taxpayers themselves, even a risk of attracting penalties.

Final thought

Taxpayers affected by the self-assessment threshold change should familiarise themselves with the new threshold to ensure they understand their obligations, despite HMRC’s initial recommendation that self-assessors need not take any action. Be aware, while this increase in the SA threshold came into play back on April 6th 2023 it is only since April 6th 2024 when us contractor accountants had to prep tax returns for limited company directors (shortly after the year ended April 5th 2024), that this HMRC simplification felt like anything but a simplification.