Tax changes need to be communicated better
IMPORTANT changes to the way savings and dividends are taxed haven't been properly communicated to taxpayers, says a House of Lords committee.
The Lords were reporting on the Draft Finance Bill 2016, which will be subject to confirmation at Budget 2016 - scheduled for 16th March.
Their report says that although the changes will come into effect in a matter of weeks, most taxpayers are unaware of their existence.
Part of the issue, they say, is that while some of the changes should simplify taxation for many people, others could complicate the matter - and many shift the responsibility for getting it right onto us.
Easier to save
The changes include the introduction of a Personal Savings Allowance, which lets us earn interest tax free up to £1,000, and the abolition of the tax deduction scheme, under which banks made those deductions for us.
Most people know about the introduction of the Personal Savings Allowance (PSA), which allows most people to earn up to £1,000 in interest on savings and other accounts tax-free.
For many of us the Personal Savings Allowance effectively cancels out the need to know about the demise of the Tax Deduction Scheme for Interest - under which banks and building societies have deducted tax for us before we receive that interest.
Previously, those on low incomes would need to fill out forms if they wanted to try and claim the tax on interest back.
Caroline Miskin, from the TaxAid charity, said that the changes would "address the issue that many savers do not reclaim tax to which they are entitled".
But at the same time, it's now up to those who do need to pay tax on the interest they've earned to make sure they do so.
On a similar note, the rules about dividends are also changing. A new dividend allowance "unconditionally" removes the tax charge on the first £5,000 of dividends.
HMRC estimate that 85% of dividend-receiving taxpayers will be better off under the new rules.
They say that the changes will generate £2 billion of extra tax, but that this will come from those with receiving more than £5,000 - most likely small business owners who pay themselves in the form of a dividend rather than a salary.
Once again, anyone earning more than the threshold amount - in this case £5,000 - will need to notify HMRC and pay tax on the extra.
But because of the low awareness of the "imminent changes", the Lords say that many people don't know they may have to take on the responsibility of filing tax returns and paying what they owe themselves in the future.
Those who do want to find out more face the challenge of trying to navigate the HMRC website. As Graeme McColgan, a financial planner at Million Plus Financial Planning, says:
"It is very difficult for ordinary taxpayers to navigate the information on the HMRC website. Even with our experience we find it difficult and we know the website inside out."
So perhaps it's for the best that one of the measures suggested in the Draft Bill is replacing Self Assessment tax returns for some people with Simple Assessment.
This will involve giving HMRC the power to assess how much tax we owe based on information supplied by our employers, pension providers, banks and other third parties.
Simple Assessment basically means that people with straightforward tax affairs won't have to fill out a tax return if HMRC already hold enough information to calculate what they owe.
Instead they'll be sent a notice telling them how much that is, together with a simple calculation.
HMRC say approximately two million people should benefit from the introduction of Simple Assessment, among them pensioners whose only taxable income is the state retirement pension.
The introduction of the Simple Assessment marks the first step towards a system of digital tax accounts that is set to replace tax returns by 2020.
The problem here, as the Lords point out, is that many people are unprepared for a switch to a digital system.
It's worth noting that the committee generally approve of the measures to simplify the tax system for as many of us as possible.
But it's not surprising that they've been deeply critical of HMRC's approach to letting us know - which has mostly involved putting information on the HMRC website and handing out three-page brochures for display in banks.
And with so little time left before these changes come in, HMRC aren't doing any more to try to raise awareness any further.
Brian Redford, Director of Specialist Personal Tax at HMRC, says they will only put more effort in "if we start to receive many calls and contacts from people who are confused".