Simple Assessement - a raw deal for pensioners? 19th August 2024
Graeme's Blog
Blog – 19 August 2024
Simple Assessment
Until around 2021 there were a number of pensioners in the UK who had no need for interaction with HMRC. The only pension they received was the State pension and this was below the personal allowance of £12,570 and hence not sufficient to be liable to tax. This would be the same for both parties in a marriage or civil partnership.
In the March 2015 Budget, the government announced the introduction of the Personal Savings Allowance (PSA) to take effect from April 2016. This meant that the vast majority of taxpayers had no tax liability on their savings income. In recognition of this, from the same date, banks and building societies no longer deduct (or “withhold”) tax from payments of interest to account holders under the Tax Deduction Scheme for Interest (TDSI). The PSA was £1,000 for basic rate taxpayers, £500 for higher rate taxpayers and nil for additional rate taxpayers.
The PSA has not changed since that date. Clearly with many married couples Bank and Building Society accounts being in joint names it is possible for theses couples to benefit from two PSA’s each tax year. Indeed, there is scope to apportion savings between spouses where relevant to ensure that the maximum savings allowances were used.
Those in receipt of dividends were helped from 6 April 2016 when the Dividend Tax Credit was replaced by a new Dividend Allowance in the form of a 0% tax rate on the first £5,000 of dividend income per tax year.
So, the combination of the above was enough to ensure many pensioners did not pay tax.
What has changed?
Many things, firstly personal allowances have now been frozen until 2028 and so has the PSA. The dividend allowance is now just £500 (10% of what it was on its introduction in 2016). The situation has been exacerbated by rising inflation reaching over 10% in early 2023. As State Pensions are increased at least in line with inflation pensions have increased considerably. Also rising inflation led to higher interest rates with the result that only £20,000 on deposit could lead to interest in excess of £1,000.
As a result of a combination of the above an estimated 400,000 more pensioners may face a tax charge next year. It would not be practical to bring all of these pensioners into Self Assessment especially as many will not have access to computers or the internet.
So, we now have the advent of “Simple Assessment”
It is reported that HMRC are sending simple assessment letters to about 560,000 taxpayers over the next few months. This number includes 140,000 pensioners. For many, this will be the first time they have received a simple assessment letter.
HMRC use simple assessment as a way of collecting tax they think you owe. It is used as an alternative to Self Assessment, where you would need to complete a Tax Return. It is necessary if HMRC cannot collect the tax by adjusting a PAYE tax code. For example, this might be where there is not a PAYE source of income – like a private pension – or where there is too much tax owed for it to be collected via PAYE.
Individuals in simple assessment do not have to submit a Self Assessment tax return to pay tax on the taxable part of their income. Instead, HMRC send the individual a calculation of tax owed for the tax year (the calculation is referred to as a PA302). This should also be available to view in the taxpayer’s personal tax account.
HMRC base the simple assessment on information that the Department for Work and Pensions (DWP), employers and other organisations (such as banks) provide to them. It is important to check the figures on the simple assessment calculation carefully.
What to do if you receive a simple assessment letter
If you receive a simple assessment letter from HMRC, you should check the figures carefully. The second page of the letter contains a full tax calculation, which sets out the different sources of taxable income which HMRC believes you had in the tax year.
A recipient of the letter needs to make sure that the calculation includes all their sources of taxable income in the year, as well as any deductions or reliefs they may be entitled to. The common sources of income that may appear in the simple assessment calculation are:
The simple assessment letter should also include a brief explanation of how the amount owed has arisen.
If you agree the calculation, all you need to do is pay the amount owed to HMRC by the deadline given on the letter.
If you do not agree the calculation, you should contact HMRC to explain why within 60 days of the date of the letter. If you do not contact HMRC within 60 days, then you lose the right to challenge the calculation – though HMRC may, at their discretion, consider queries made after that 60-day deadline.
If you still do not agree with the calculation after HMRC have given you a final response to your queries, you can appeal to the First-tier Tax Tribunal within 30 days of HMRC’s response.
The simple assessment letter should tell you about the date by which income tax should be paid.
In general, the amount owed under simple assessment should be settled by 31 January following the end of the tax year. For example, in the case of a simple assessment for the year ended 5 April 2024, the amount owed should be paid by 31 January 2025.
However, if HMRC do not issue the simple assessment for 2023/24 until after 31 October 2024, then the payment deadline is extended to three months after the date of the assessment.
If you receive a simple assessment for 2023/24, you do not need to wait until 31 January 2025 to make the payment if it suits you to pay it sooner, or if you need to pay in instalments. If you are able to pay the full amount by the deadline, you do not need to agree such a payment plan with HMRC.
If you do not believe you will be able to pay your simple assessment bill for 2023/24 by 31 January 2025, then you should be aware that late payment interest will accrue from 1 February 2025. However, late payment penalties do not currently apply to late paid tax under simple assessment.
It is important that you contact HMRC to let them know if you are unable to make the payment in full by the deadline. You may be able to agree a payment plan with HMRC and avoid HMRC taking further action to collect the debt, such as referring your case to a debt collection agency.
Summary
Clearly it is not just pensioners affected and indeed with the freezing of personal allowances more and more people will be brought into the tax net as each year goes by. We have already heard that the Government may extend the freeze on personal allowances and no doubt the PSA beyond 2028. This would bring many more taxpayers within simple assessment potentially most recipients of a state pension.
Quite what happens if HMRC do not issue an assessment for a few years and then issue them for multiple years needs to be made clear. Otherwise, we will have the Child Benefit saga repeating itself. There will need to be more staff in HMRC to keep up with this new initiative and certainly more to answer telephone calls and letters appealing against incorrect simple assessment figures.
Unless the situation is carefully managed a number of recipients may believe that Simple Assessment proves to be anything but!