Under the plans in the consultation documents, the current pay-as-you-earn tax collection system would be changed to allow HMRC to easily adjust workers’ tax codes to collect tax owed on bank and building society interest (BBSI)
HMRC is set to get more powers to collect unpaid tax as part of plans released in the Spring Statement this week. According to reports, Rachel Reeves is potentially looking to make it easier for the tax office to collect extra owed tax from paychecks.
The Telegraph reports that the Treasury is “concerned” that savers are failing to pay the tax they owe on interest. Under the current rules, the personal savings allowance for 20% basic rate taxpayers is £1,000. This means you can earn up to £1,000 worth of interest before having to pay tax.
For higher 40% rate taxpayers, the allowance is £500. Additional rate taxpayers – so those with a salary higher than £125,140 – receive no tax break at all. HMRC usually collects this by changing a taxpayer’s tax code through the PAYE system.
The new proposals are set to make it easier for HMRC to take this owed tax directly from pay packets. Consultation documents on the measures were published on Wednesday after Rachel Reeves delivered her Spring Statement to the House of Commons.
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Banks and building societies are already responsible for passing information about customers who need to pay tax on their savings to HMRC, but the data is often incompatible with current systems. The proposal documents state that as many as one in five accounts are unreadable, meaning that tax owed can’t be collected.
Under the plans in the consultation documents, the current pay-as-you-earn tax collection system would be changed to allow HMRC to easily adjust workers’ tax codes to collect tax owed on bank and building society interest (BBSI).
The consultation says: “The department already adjusts PAYE tax codes for BBSI income as part of its annual reconciliation process – timely financial account data will enable tax codes to reflect a more up-to-date position for taxpayers. There is a growing case to improve data quality reporting to ensure the process for paying tax is easier for taxpayers and that the correct amounts are accounted for and collected to fund our vital public services.”
HMRC would be able to issue assessments of how much savers owe up to four years later – or up to six if there was “careless behaviour”. However, if there is suspicion of deliberate evasion, it could be extended by up to 20 years.
HMRC predictions estimated that £10.4billion would be paid in savings tax during the 2024-2025 tax year, with the bulk of payments coming from additional-rate taxpayers. This group make up £8.3billion of the total, with basic-rate taxpayers contributing £527million.
Tax experts have, however, criticised the proposals, noting concerns over the potential “expansion of Big Brother” by the government. Mike Warburton, former tax director at Grant Thornton, said: “I have no problem with HMRC developing and expanding their systems to collect information that they need to assess the tax that we owe.
“What I would be concerned about is the expansion of this into a ‘Big Brother’ scenario where the Government collects information of a wider nature which they can then use to control us.”
John O’Connell, chief executive of the TaxPayers’ Alliance, also criticised the approach adding: “HMRC has become increasingly Kafkaesque in its dealings with the public, particularly high earners with complicated tax affairs. The taxman needs to ensure that any changes result in a more open, transparent and receptive body than is the case now.”
According to HMRC data, 2.7 million savers paid tax on their savings in the 2023-24 tax year, the rise is due to rising interest rates over the last few years. The figure is also four times the number of people compared with four years ago, when interest rates were close to record lows. HMRC believes an additional 893,000 people will have to pay tax on their savings by 2028-29.
In a statement on the proposals, an HMRC spokesperson said: “These changes, if taken forward, would be positive for savers by making it easier for them to get their tax right the first time.”
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