Tax return simplification could cause a tax headache

Before the personal savings allowance (PSA) and the dividend allowance (DA) were introduced in April 2016, interest was paid by banks and building societies to savers net of basic-rate tax, and dividends were deemed to be received net of a notional, basic-rate tax credit.

The old rules worked well for basic-rate taxpayers, who would have had the correct tax deducted at source. But higher earners would often have to file tax returns to pay additional tax on this income, even for relatively minor amounts, while non-taxpayers were left to seek repayments of tax on sometimes trivial amounts of interest. 

The PSA and DA operate by taxing income falling within them at a rate of 0%, so no income tax is suffered directly on income within the allowances. Since it was introduced, the PSA has been set at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers, while additional rate taxpayers receive no PSA. The DA has suffered the most severe cut and is now £500 for all taxpayers, having previously been £1,000 (in 2023/24), £2,000 (between 2018/19 and 2022/23) and £5,000 (in 2016/17 and 2017/18). 

For taxpayers who receive relatively small amounts of interest and dividends, the introduction of these allowances has been welcome (although perhaps not the subsequent 90% decrease to the DA over its lifetime). But the way these allowances work is misunderstood, giving rise to several problem areas for taxpayers, and isn’t quite nailing the brief of universal tax simplification. 

Adjusted net income (ANI) is used to determine a taxpayer’s marginal rate of income tax, whether their personal allowance is tapered and whether they incur the high-income child benefit charge (HICBC).  

The problem with the PSA and the DA is that income falling within these allowances, despite being subject to income tax at 0%, is still taken into account when determining an individual’s ANI. As a result, the receipt of any amount of savings or dividend income, even significantly less than the allowances, may increase an individual’s tax liability if it increases their ANI to:

• between £100,000 to £125,140, as it will likely impact on the tapering of their personal allowance and increase their tax bill;
• beyond the higher rate (£50,270) or additional rate (£125,140) threshold, as it will reduce that individual’s entitlement to the PSA; or
• between £60,000 to £80,000 (£50,000 to £60,000 prior to 6 April 2024), as it may increase the amount of the HICBC they incur. 

With the above in mind, individuals that are no longer required to file a SATR should continue to inform HMRC of any dividend and savings income that either exceeds their available allowances or potentially results in an income tax liability due to a knock-on effect of increasing their ANI. Taxpayers can notify HMRC of their other dividend and savings income through their personal tax account or by phoning an HMRC helpline, although staying on top of these minor adjustments might feel just as onerous as filing a SATR. 

In the name of achieving real tax simplification, and at the expense of a small amount of tax revenue, HMRC could consider revising the operation of the PSA and DA so that income within these allowances does not impact on an individual’s ANI. Otherwise, the revised SATR filing criteria will likely result in many headaches as individuals replace filing their tax returns with regularly updating their PAYE codes for fluctuating amounts of savings and dividend income.