The personal tax computations for 2016/17 are particularly complex due to the introduction of the variable savings allowance (at £500 or £1,000), and the £5,000 dividend allowance.
It has always been possible to off-set the personal allowance against any slice of income, but in earlier years the best result was generally achieved if the personal allowance was first set against earned income. That is no longer the case for taxpayers with significant amounts of savings or dividend income.
Unfortunately, HMRC’s programmers can’t cope with all those variations and have admitted defeat for two distinct groups of taxpayers:
These have total income including savings and non-savings income over £32,000 of which the non-savings income is between £11,000 and £16,000. The taxpayer should benefit from the savings rate band of up to £5,000, as their non-savings income not covered by the personal allowance won’t use all of the savings rate band.
The HMRC approved tax return standard fails to give the benefit of the savings rate band and hence overcharges taxpayers by up to £1,000.
These have non-dividend income of £27,000 to £32,000 plus dividends which take their total income to over £145,000. These taxpayers don’t receive any personal savings allowance, as their income makes them additional rate taxpayers. But they do qualify for the £5,000 dividend tax allowance.
The HMRC approved software standard incorrectly deducts the dividend tax allowance that falls in the unused basic rate band from the higher rate band which then pushes dividends up into the additional rate. This error could cost the taxpayer up to £280.
If you fall into either of those groups, our tax software should warn us that the 2016/17 tax return can’t be submitted online, as this would result in an incorrect tax computation. HMRC has included those two groups of taxpayers in the list of exclusions from online filing (see numbers 51 & 52 in new exclusions list to be published on 6 April).
This means the 2016/17 tax returns for those taxpayers have to be filed as a paper form. Where the paper tax return is filed after 31 October the exclusions list gives you a reasonable excuse.