Taxing questions answered As the self-assessment deadline nears, Teresa Hunter responds to readers' HMRC worries.
WITH soaring redundancies coming on top of plunging earnings, returns on investments and property, even the best-organised tax arrangements are likely to be in disarray. Never has the looming tax deadline caused such anxiety for millions of consumers.
To make matters worse, taxpayers have received an urgent warning that fraudsters have been attacking the HM Revenue & Customs (HMRC) electronic self-assessment system. Criminals are bombarding taxpayers with thousands of scam e-mails in the run-up to the January 31 self-assessment deadline telling them they are due a tax refund and asking for bank or credit card details so the fictitious refund can be paid out.
Once they get hold of this information, customer bank accounts are emptied and credit cards maxed out. The victims also risk having their personal details sold on to other organised criminal gangs.
But for most individuals it is the looming January 31 deadline that has them biting their nails. It is too late to send in a paper return, so if you do you will be hit with a 100 penalty.
However, there is still time to file electronically. You must begin this process as soon as possible, as it takes a few days for the HMRC to supply a password. The later you leave it, the more problems you can expect, as the system becomes frantically busy as the deadline looms.
Failure to submit your return and make payments due will land you with penalties. On top of this, payments in respect of the first six months of the current tax year must be made based on last year's earnings, which may have since collapsed. Those facing redundancy will also be anxious about tax rebates and how any severance pay will be treated.
Head spinning? We try to answer your questions.
Q: I have just been made redundant, and am receiving a lump sum. How is this taxed? I'm afraid I could lose 40% to the taxman.
A: Redundancy payments are tax-free in most situations up to 30,000. After that it is added to any income you have earned in the tax year and taxed at your highest rate.
If you are over 50 you could consider paying some of your lump sum into a pension to save tax. A quarter can immediately be withdrawn as a tax-free lump sum. You might also talk to your employer about salary sacrifice. If he makes the payment this could also save on National Insurance.
Q: I doubt I'll find a job any time soon. Can I ask for my severance pay to be taxed in the next tax year?
A: No. However, if you are in any way able to influence the timing of redundancy, it could help if you were able to hang on until the next tax year.
Q: Will I be due a tax rebate if I lose my job?
A: If you are employed and taxed under Pay As You Go (PAYE), your personal allowance for the year (currently 6,035) is divided in 12 and then deducted from your monthly salary. However, if you do not work the whole year, you will have unused personal allowance which will be refunded to you. On that basis, you may also have paid too much higher-rate tax.
To get the money back, complete the section on the self-assessment form asking for a refund or write to the taxman. Alternatively, if you expect to be back in work shortly, you can wait for it to be sorted out by your new employer when you hand him your P45.
Q: My earnings this year are likely to be lower than last year. How can I reduce the amount due under payments on account?
A: This particularly hits the self-employed, but may also affect those with investment income, who will have to pay tax due on earnings for the first six months of the current tax year by January 31 based on earnings for the year 2007/8, which may now look like a dream.
It is possible to reduce the January bill by applying to make a lower payment if you specifically request this by filling in a form, SA303, which can be downloaded from the internet.
Q: I'm self-employed and my income has collapsed. I've had to use the money coming in to pay my household bills. I simply do not have the cash to settle the tax I owe. What can I do?
A: The Government says it wants to help people in your situation and has set up the Business Payment Support Service, which can help you reschedule payments. It will have to be paid in the end and you will incur interest on money owed to HMRC until it is settled, but you won't be hit with penalties and fines for non-payment.
This service is available to individuals as well as companies. For more information visit www.hmrc.gov.uk/pbr2008/business-payment.htm or call the helpline on 0845 3021435. But you must contact them before the January 31 deadline by which payment is due.
Q: I recently discovered that I have been under-taxed for some time, and have been hit with a big bill due to HMRC error. Do I have to pay up?
A: The short answer is yes. However, if you were a genuine victim of HMRC bungling, then you may be able to mitigate the bill by applying for it to be reduced via an HMRC A19 form.
This may be of particular use to families who were overpaid tax credits and then found themselves subject to sharp clawbacks. However, if it should have been obvious to you that something was awry and you did nothing, you may not get much sympathy.
Q: Some of my shares have fallen in value by more than 30%. Is there any way I can recoup this loss by offsetting against other taxes?
A: You can't offset capital losses against income tax, but you can offset them against other capital gains. This loss can be carried forward indefinitely, which may help with future tax planning.
Q: I have just sold a buy-to-let flat at a loss. Can I offset it against the rental income?
A: No. Again, this is a capital loss which can only be offset against other capital gains, but you can carry it forward.
Q: I hate the thought of paying the taxman early, but equally don't want to risk missing the deadline. Can I send HMRC a postdated cheque for January 31, or does the money have to have been cleared by then?
A: HMRC only needs to be in receipt of payment, the cheque does not need to have cleared. However, sending a postdated cheque is a high-risk strategy. Banks can still cash them early, and if you don't have the funds available you could potentially incur penalty fees from both HMRC and the bank.
A better solution is to arrange an electronic transfer if you bank online, or transfer cash by telephone banking. Another failsafe method is to deliver the cheque by hand to beat the deadline.
Dos and don'ts when filling in your return
• Read all the questions carefully
• Get all relevant paperwork together before starting
• Make sure the employee benefits listed tie up with the P11D (benefits statement)
• Remember that not all state benefits are taxable
• Include personal pension contributions made from post-tax earnings
• List Gift Aid payments and any other charitable donations
• Make sure the bank or building society interest received plus the tax that has been deducted add up to the gross amount and make sure you enter the figure that is asked for – the after-tax amount in most cases
• Register for the HMRC online filing system by January 22 to ensure the activation pin is sent out in time
• Miss out any questions
• Enter income from Isas or Peps
• Leave it until the last minute – mistakes are more likely if the process is rushed. The online filing system also gets very busy during the last two weeks before the deadline
• Forget that for e-filing you have to register with HMRC in good time to have your account set up and get your password. Allow at least a week for that part of the process
• Include pension contributions to an employer's pension plan deducted directly from pre-tax earnings
• Forget to complete all the relevant supplementary sections, eg employment or land and property sheets
• Forget to tick the box if a repayment is due and include the bank account details where the money should be sent to
• Forget that any tax owed needs to be paid by January 31 – it's not just a case of getting the form in
• Forget to sign the documentation
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