Individuals face demands for up to £1,000 of tax that they do not owe thanks to outdated software being used by HMRC’s calculators, Telegraph Money can disclose.
The problem, confirmed by accountants and admitted by HMRC itself, applies to distinct groups of people who have certain combinations of savings and other income.
It arises because HMRC’s online tax calculators, which are used by online taxpayers, have not been updated to cope with recent changes to tax allowances. The calculators apply the allowances in a rigid, preprogrammed order, with the result that people with particular patterns of income are losing taxbreaks.
Who is affected?
The errors stem from a failure to best utilise four different – and complex – tax allowances, some of which kicked in from the tax year beginning April 2016. The four allowances are the personal savings allowance (which gives £1,000 of tax-free savings interest a year for basic-rate taxpayers); and, secondly, the £5,000 allowance for tax-free dividend income.
Thirdly, there is the “savings starting rate” which gives you tax-free savings interest of up to £5,000, (depending on how much you earn above your personal allowance). Lastly there is the personal allowance itself of £11,000 for the 2016-17 tax-year and £11,500 for the current one.
There are several scenarios in which the way HMRC has chosen to use these different allowances will disadvantage taxpayers. It means the order HMRC applied the allowances is not always the most tax-efficient.
The taxpayers that could be affected include those with total savings and non-savings income over £32,000 of which the non-savings income is between £11,000 and £16,000.
There is another, wealthier group – likely to comprise those who own shares in their own businesses – with non-dividend income of £27,000 to £32,000 plus dividends which take their total income to over £145,000.
And there are yet others. Susan Scott, 77, a reader who featured in these pages previously, earns far less than the above examples – with virtually no pension income but a healthy dividend and savings income – yet she too could be overcharged by £266 thanks to the systems problem.
How do I ensure I don’t pay too much tax?
Individuals who submit their tax returns themselves have a few options.
One costly option is to employ an accountant. An alternative is to submit a paper tax return, rather than an online return.
Whether you complete your own calculations on the paper return, or leave the sums to HMRC, you should include the following text to ensure HMRC does not use the flawed formula to arrive at a figure.
Accountants recommend adding a clear note such as: “Please calculate my tax liability so as to give rise to the lowest possible figure under the legislation, taking into account, if appropriate, the errors in HMRC’s tax calculation software as illustrated in HMRC’s self assessment exclusions for 2016-17.”
However, those that do not need to file their tax return in a hurry might be better to wait and see if HMRC corrects the system, advised Ms Riches.
What about the deadline?
For those filing paper tax returns the deadline is earlier – October 31 rather than the following January 31.
However, HMRC has extended the paper filing deadline for those affected. It has included the errors in its list of “exclusions” for the year.
HMRC stated: “HMRC will accept that the taxpayer had a reasonable excuse for failing to file a paper return by the normal 31st October deadline. A reasonable excuse claim should accompany the paper return.”
Will it be fixed?
HMRC said that it planned to have a fix to the problem for the 2017-18 tax year. However, in the 2017-18 tax year further changes to tax allowances occur bringing further complications.
Ms Riches said: “There has been some pressure on HMRC to correct this, it is not beyond the realms of possibility to sort out the software problem.
“When they start to realise how people coping with this will create a lot of additional work for them they may decide they have got to accelerate the fix and get it sorted.”