Increase in people brought within scope of UK Self-Assessment

Many individuals who have not historically fallen within the regime are now finding themselves with a requirement to complete a tax return, often unexpectedly.

For several years, the tax allowances and thresholds have been frozen at their current levels, whilst income from many sources has continued to grow in line with inflation. This has resulted in more people being pushed into a higher tax band, and potentially losing their personal allowance entitlement if their income exceeds £100,000. Where HMRC have not correctly adjusted for this through the tax code, it may be that a tax return is required to ensure that the correct amount of tax is paid.

The cost-of-living crisis has also meant that an increasing number of people have pursued side ventures to supplement their income, commonly utilising methods such as Vinted and Airbnb. Individuals often misunderstand that any income from sources such as these will be free from tax however, this is not always the case and, depending on the level of income generated, there may well be reporting requirements.

There are currently instances where tax returns are not required despite the need for individuals to pay tax, which can cause understandable confusion for taxpayers regarding their duties to report income to HMRC. Currently, no tax return is required where trading income falls within the trading allowance of £1,000, with Government plans to increase this reporting threshold to £3,000 by the end of the current parliament. However, the trading allowance will remain at £1,000 and the excess will still need reporting to HMRC through a ” in order for the tax to be paid.

Other examples include where rental income is below £2,500 after expenses are deducted, or below £10,000 before expenses are deducted. It should be noted however that HMRC should still be notified that this income is being received and tax may still be payable, so completing a tax return may still be a simpler disclosure method in these cases, particularly given the challenges of communicating with HMRC over the phone or by post.

In addition to this, given the political and economical climate over the past few years, we have seen a dramatic increase in interest rates from banks and other lenders. Consequently, the amount of interest being earned by some individuals has risen significantly and caused their untaxed investment income (which also includes dividends) to exceed the £10,000 of investment income level at which one is required to report under the Self-Assessment regime.

Again, the savings allowance for interest is much lower than this reporting threshold (£1,000 for basic rate tax payers, £500 for higher rate taxpayers and £0 for additional rate taxpayers), so interest received may still need disclosing to HMRC even if it is below the £10,000 reporting requirements, in order to pay the tax due on this interest. Over the same period, we have seen the available dividend tax free allowance fall from £2,000 to £500, having initially been £5,000 when it was first introduced.

Capital gains tax annual exemptions have also been cut over the last few years, falling from £12,300 to £3,000. This has meant that individuals disposing of assets are more commonly realising taxable capital gains, which must be reported on a tax return. This is especially pertinent given the recent inheritance tax changes, which have resulted in more people looking to pass wealth down to future generations during their lifetime by gifting assets.

In the 2024 Autumn budget, the Government announced changes to the capital gains tax rates, as of 30^th October 2024.

These changes included an increase in the lower rate of capital gains tax from 10% to 18%, and an increase in the higher rate from 20% to 24%, bringing these in line with the existing rates applied to resident property disposals. Business Asset Disposal Relief is subject to a tapered increase, moving to 14% from 6th April 2025 and 18% from 6th April 2027.

These changes mean that it is necessary to apply different rates of capital gains tax to asset disposals, depending on whether they took place before or after 30th October 2024. Anybody with capital gains arising in the 2024/25 tax year should therefore ensure that they are applying the correct tax rates when calculating the capital gains tax due on their disposals. It should also be noted that any capital losses arising in the year, or brought forward from an earlier year, are available to be utilised in the most beneficial way for a taxpayer. This means that they can be offset against the capital gains taxed at the higher rate first.

This will be particularly challenging for individuals who have made a significant amount of capital disposals for the 2024/25 tax year, for example if they have share portfolios through which there are often substantial numbers of transactions.

It should also be noted that any UK resident individuals disposing of residential property, which has not been their main residence for the entire period of ownership, are likely to be caught under the 60-day capital gains tax reporting requirement. This is extended to all disposal of residential and commercial property for non-UK resident individuals.

HMRC is currently writing to taxpayers who have submitted their self-assessment tax return for 2024/25 and who may have failed to apply the correct rate of CGT on disposals made on or after 30^th October 2024.

The Self-Assessment tax return may not automatically calculate CGT liabilities as the main rates have increased. In this instance, the taxpayer will need to make an adjustment on their return, and HMRC have provided an online tool to assist with this.

If you receive a letter from HMRC regarding this, you will have 30 days to take action and either amend your tax return or contact HMRC if your return is correct and they have made an error.

HMRC will charge interest on any CGT that is paid late, so it is important to remain on top of any errors that come to light and seek assistance from a specialist tax adviser if required.