Record numbers of savers, workers and investors are being hit with tax bills after exceeding their tax-free allowances on everything from savings interest to capital gains.
That is because allowances have remained frozen for years, and in some cases been hacked back.
Many of those incurring a tax bill don’t realise it’s their responsibility to pay up, rather than wait for HM Revenue & Customs (HMRC) to spot it and demand the money.
So what do you have to do if you exceed one of your allowances?
Many of those incurring a tax bill don’t realise it’s their responsibility to pay up, rather than wait for HM Revenue & Customs (HMRC) to spot it and demand the money
Tax on the state pension
Retirees with a state pension could soon attract an income tax bill for the first time.
The full state pension is set to increase to £12,547 from next April, thanks to the triple lock. That will bring the state pension to just £22.40 shy of the personal tax allowance. As a result, anyone getting even a small income on top of their pension could face a bill.
HMRC should be able to collect what is owed by adjusting your tax code and taking it from your income. If you do not have a tax code, the taxman should send you a letter telling you how much you owe. If you have untaxed income over £2,500, or it’s from multiple sources, you will likely need to file a self assessment tax return.
Capital gains
The amount of capital gains tax (CGT) paid by investors is expected to soar from £13.3 billion in 2024/2025 to £25.5 billion in 2029-30, according to official forecasts.
Growing numbers are paying the tax since the CGT allowance was slashed to £3,000.
To avoid going over your allowance, you could sell assets across multiple tax years.
Rachael Griffin, tax and financial planner at wealth manager Quilter, says: ‘You may wish to consider staggering asset sales across tax years to maximise your exemption.’
One trick is to pay more into your pension in that tax year to cut your taxable income and move into a lower tax band.
Personal savings allowance
The amount of tax that savers pay on interest has leapt from £1.4 billion in 2021-2022 to an estimated £6.1 billion. That’s because the personal savings allowance has never increased.
The allowance permits basic-rate taxpayers to earn up to £1,000 in interest tax-free, and higher-rate taxpayers up to £500 – additional-rate taxpayers have no allowance.
Banks, building societies and National Savings and Investments, (NS&I) should report your taxable interest directly to HMRC. If you owe tax, they should collect it through your tax code.
Make full use of your Isa allowance of up to £20,000 each tax year, as interest earned in these are sheltered from tax.
Dividend tax allowance
The dividend allowance has been slashed to £500 from £2,000, so growing numbers of investors are getting tax bills.
It is up to you to inform HMRC, and if your dividend income is over £10,000 you must declare the income.
Side hustle allowance
You can earn £1,000 tax-free on the side, for example by selling goods online or doing a bit of tutoring, before facing tax, thanks to a perk known as the trading allowance.
If you earn more than that, you must let the taxman know.
Ms Griffin says: ‘HMRC’s tax collection methods are increasingly sophisticated, and its Connect system cross-references a wide range of data sources to trace income and ensure the right amount of tax is paid.’
