The impact of rising interest rates on those with variable rate mortgages has been well publicised. However, not everyone is affected and those on fixed rate mortgages may have seen no difference at all in their monthly mortgage payments, and, for the time being at least, may wonder why there is a problem. For those with money in the bank and, despite the fact that lenders are generally much quicker to raise their mortgage rate than to raise the amount they pay out to their depositors, things have been looking much rosier. Interest receipts are already visibly higher in the 2022/23 tax return entries and will probably continue to grow in 2023/4.
This, of course, has a tax consequence. Bank and building society interest is now paid out without any tax deduction, but it is still taxable. The “starting rate” and “personal savings allowance” (PSA) have, in the past, largely eliminated the liability for many but, for higher rate taxpayers in particular, the £500 allowance is quite modest and can easily be exceeded as interest rates rise. Taken in conjunction with reducing dividend allowances, it is already clear that far more taxpayers will be incurring a liability on investment income – this number is likely to increase in 2023/24. For example, a higher rate taxpayer with £2,000 of dividends and £40,000 on deposit might have received interest of £400 in 2021/22, so all investment income would have been tax free. In 2023/4 the dividend allowance will halve and the interest received could easily be £1,200, resulting in a tax charge of over £600. Even a basic rate taxpayer would incur a tax charge of over £100.
There is also a compliance issue which is likely to trigger a number of problems. One of the promised benefits of Making Tax Digital was that the number of taxpayers required to submit annual returns would fall, since income from all sources would be gathered to “prepopulate“ the tax records, meaning that no taxpayer input would be required.
Presumably as part of this process, it was announced in a taxpayer agent update in May that, from April 2024, taxpayers whose income derives mostly from PAYE (and who have no rents or self-employment) will no longer need to file a return if the income is below £150,000 (currently £100,000). Those affected by this will receive a letter removing them from self-assessment in due course. However, it is by no means clear how such taxpayers will, for example, be able to claim the higher rate relief on gift aid and private pension contributions nor how HMRC will pick up the growing amounts of bank interest paid gross or indeed private or offshore interest and UK and foreign dividends. Even if such information is supplied to HMRC by the listed companies (and is accurately matched), there is no mechanism for HMRC to pick up private company dividends.
The interaction of all these factors could give real problems, particularly where a taxpayer is on the cusp of the 60% marginal band and where significant liabilities might depend on information which HMRC are apparently saying that they do not need. There is a real danger that taxpayers will receive the HMRC “exit letter” and assume that they never need file a tax return again. This raises the danger of underpaying tax on investment income (particularly as interest rates rise or circumstances change) with consequent interest and penalties for failure to declare. Alternatively, taxpayers may not be given the reliefs to which they are entitled and end up overpaying.
Winston Churchill is quoted as saying that “democracy is the worst form of government – except for all the others that have been tried.” One might say the same of the annual self-assessment return.
*The views expressed are the author’s and not ICAEW’s.