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LITRG outlines some tax issues to consider around the start of the new tax year on 6 April.

Introduction

The new tax year is a good time to take stock of tax and tax credits matters. So make your new (tax) year’s resolution to sort out forms and papers – the earlier the better!

This article covers tax matters you might need to think about this month. But the start of the new tax year is also a key date for tax credits, as explained in our article ‘Tax credit and the new tax year – changes and renewals’. 

1. General Tax and National Insurance changes from 6 April 2011

Tax and NIC rates can change each year. For this April, you should particularly note:

• There is a £1,000 increase in the basic personal allowance for income tax for those aged under 65 from £6,475 in 2010/11 to £7,475 in 2011/12 – this is the amount of income most people can have before they start to pay tax.
• National Insurance rates have increased by 1%. This means that employees now pay a primary rate of class 1 NIC of 12% (up from 11%) and the self-employed pay class 4 NIC of 9% (up from 8%). But this increase is offset for those on lower incomes by increases in the lower limits you can earn before starting to pay them - £139 a week for employees and annual profits of £7,225 for the self-employed.
• From April 2011, changes are being made to the way class 2 NICs are collected from the self-employed.
• From 6 April 2011, HMRC will increase business mileage allowances. Where employees use their car or van for business mileage, they can now claim tax relief of 45 pence per mile (up from 40 pence per mile) for the first 10,000 miles reducing to 25 pence per mile thereafter. Charities and other similar organisations engaging volunteers will also now be able to pay them the 5 pence per mile passenger rate.

2. Employees and pensioners - check your coding notice

You should check your PAYE coding notice each year. If yours contains a restriction for tax underpaid for earlier years, you might need to take action to challenge that underpayment and/or dispute your tax code. New codes will start to be used by employers and pension providers from 6 April.

3. Pensioner issues

a. Check the tax on your state pension

The state pension is taxable like any other pension but confusion arises as tax is not taken off it before it is paid to you. The tax either has to be collected by adjusting the tax taken off your other earnings or pensions under Pay As You Earn (PAYE), or by completing a self-assessment tax return.

An important piece of paper is sent out to state pensioners by The Pension Service at this time of year – your notification of how much your weekly pension will be from April. Use it to check your PAYE coding for 2011/12, and keep it safe –  you might need it later to help complete your 2011/12 self-assessment tax return. But do watch out as the notification might include some non-taxable benefits, such as attendance allowance, which you should not include on your tax return.

b. Cashing in small pension pots?

LITRG provides a guide to cashing in small pensions as a lump sum (known as ‘trivial commutation’) on our website (see useful links below). The limit will remain at £18,000 from 6 April 2011, although we have been pressing for increases in this amount in future. 

4. Students - working in the holidays?

If you are a student working only in vacation time and think you will earn less than your personal allowance over the whole tax year (£6,475 for 2010/11 and £7,475 for 2011/12), you can ask your employer if you can complete a form P38(S) which allows you to be paid without tax being taken off your wages. But National Insurance contributions may still be deducted depending on your weekly or monthly income.

Note particularly that if holiday work straddles the tax year end (5 April), you will be asked to sign two forms P38(S).

5. Starting to pay back your student loan from April 2011?

Student loan borrowers who completed or left their higher education course recently may have to start making repayments from 6 April 2011 if they are earning over £15,000 a year.

6. Employers – Finish off 2010/11 Pay As You Earn

Most employers now have to file their year end returns online, including filing the Employers Annual Return (P35) along with P14s for individuals. Both for returns filed online or for those that may do so, on paper, the forms must reach HMRC by 19 May. Employees’ copies of the P14 (P60) must be given to them by 31 May, with employers now having the option to distribute P60s electronically, but should take into account employees’ access to them and provide secure printing facilities. The last date for employers to settle 2010/11 PAYE is 19 April but interest and penalties may be due if HMRC find that employers have not paid PAYE on the correct dates throughout the year.

From 6 April 2011, most employers will be required to file ‘in-year’ forms such as P45s and P46s online, subject to certain limited exceptions.

7. Do you need to complete a tax return for 2010/11?

If you are registered to complete self-assessment tax returns, you should receive either a paper return or notice to complete a return (for example, file online) shortly after 6 April. You can now start gathering together the information you might need to complete the return.

There could be benefits in getting your tax return done early, for example you might be able to pay less if you are due to make a payment on account on 31 July 2011 and your tax bill is less than the previous year.

If you don’t receive a self-assessment tax return or notice to complete one in April, but you think you might have tax to pay for 2010/11 (for example, if you started to receive a new source of income on which tax is due but sufficient tax has not been deducted at source, such as rental income) you must tell HMRC by 5 October 2011. Telephone the self-assessment helpline on 0845 900 0444. Failing to notify HMRC of a new liability to tax can trigger a penalty.

8. Are you due a tax repayment for 2010/11? Claim it now!

There are any number of reasons why you might pay too much tax then have to claim it back after the end of the year. If you are due to complete a self-assessment tax return, you should get your repayment after you file your return. If you don’t fill in a tax return normally, you will need to make a separate claim in writing.

9. Savings – make sure you’re not paying too much tax

When deciding what to do with your savings, it is important to take financial advice. But here are some ideas to maximise the tax efficiency of your savings:

a. Cash Individual Savings Accounts

Putting your cash savings into a tax-free Individual Savings Account (‘ISA’) can be beneficial. For example, if you have savings in non-ISA accounts, you might want to consider switching them into ISAs if you would otherwise pay tax on them. Pensioners who have built up savings might be in this position, perhaps paying tax on the interest at 20% (or 10% if your income falls within the savings band). By putting cash into an ISA, you can earn interest tax-free.

The maximum amount of cash you can invest in an ISA in a tax year is increasing to £5,340 per person from 6 April 2011 (up from £5,100 in 2010/11). You can also hold stocks and shares and other types of investment in ISAs.

b. Getting your interest without tax taken off

If your total income for a tax year falls within your tax allowances (ie you are not a taxpayer), you can register with the bank or building society to have interest paid on your account without tax taken off. To do this, you complete form R85 (making sure you also go through the accompanying helpsheet), available to download or ask for one at your bank or building society.

The start of the new tax year is a good time to review your position and see whether you can put new R85s in place or need to withdraw them if you are now a taxpayer.

Useful links

Tax and NIC rates for the three tax years to date on the LITRG website

The changes to payment of class 2 NIC on the HMRC website.

How to check your tax code

Tax underpayments included in 2011/12 coding notices

Cashing in small pensions – trivial commutation

Students working in the holidays – further guidance

Student loan repayments – more information

Guidance on keeping records for self-assessment tax returns

Examples of why you might be due a tax repayment and how to claim it can be found in the student and pensioner sections of the LITRG website.

LITRG guidance for pensioners and students on savings tax and R85s.