Tax traps for individuals removed from self assessment – do you need to file a tax return?

Prior to 6 April 2023, taxpayers with earnings above £100,000 were required to file a tax return, even if all income was taxed at source through Pay As You Earn (PAYE). This threshold increased to £150,000 from 6 April 2023 and was removed altogether from 6 April 2024.

Whilst this is a welcome simplification, if HMRC informs taxpayers that they no longer need to file a tax return, taxpayers often incorrectly assume they no longer have tax to pay. HMRC states that you only need to submit a tax when your ‘income from savings or investments is over £10,000’.

However, there is a trap for the unwary. With rising returns on savings and investments, taxpayers should be aware that interest will still be directly subject to income tax if it exceeds the Personal Savings Allowance (PSA) of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers receive no PSA. Similarly, dividend income will be directly subject to income tax if it exceeds the dividend allowance, which is presently £500 (£1,000 in 2023/24).

Banks are required to notify HMRC of interest and HMRC will then seek to collect tax through a PAYE coding adjustment in the first instance. If taxpayers do not have sufficient PAYE income to collect the tax on savings and investments or if there is a delay in HMRC becoming aware of an amount of savings or investment income, HMRC will notify the taxpayer with a tax demand. This often comes as a shock as it is not uncommon for taxpayers to receive tax demands or PAYE code adjustments for unpaid tax up to four years after the tax year in which the bank interest was paid.

Taxpayers should be aware that there is no similar mechanism for dividend income, so taxpayers with taxable dividends of more than £500 but less than £10,000 will now need to inform HMRC to have the tax collected. Taxpayers can notify HMRC of their other income, such as dividend and savings income, through the Personal Tax Account or through the PAYE Helpline.;

Although issues with HMRC’s customer service and difficulty contacting HMRC have been widely reported, it remains the obligation of the taxpayer to notify HMRC of untaxed income and ensure their tax affairs remain compliant.

A final trap is that HMRC does not always automatically remove taxpayers from self assessment if they no longer meet the filing criteria. If taxpayers rely on HMRC to get this right, and they have no other untaxed income, taxpayers could find themselves burdened with an unnecessary administrative task, along with the threat of penalties for non-compliance. The good news is taxpayers do not have to file a return just because a filing notice has been issued. It is possible to cancel filing notices and remove taxpayers from self assessment by application to HMRC.

Taxpayers and their advisors should therefore check the requirements to file a tax return annually and assess how any untaxed income can be reported and taxed. If in doubt, taxpayers should seek advice to ensure they remain compliant in their tax affairs.