High earners with PAYE income over £150,000 will no longer have to file a self assessment tax return from 2025

HMRC has confirmed the removal of the self assessment filing threshold for individuals with income over £150,000 which is taxed via PAYE from tax year 2024 to 2025.

These changes mean up to 338,000 taxpayers will no longer have to submit a tax return.

It is important to note that if the earner has other income from dividends, savings interest and property rental, for example, they will still have to submit an annual return.

The latest change is in addition to the increase of the threshold from £100,000 to £150,000 which took effect in the 2023 to 2024 tax year.

While the exemption from filing a tax return may sound good on the surface, it is not as straightforward as it sounds as individuals may open themselves up to potential HMRC penalties and overpaid tax.

Matthew Todd, associate director at RSM UK, said: ‘Individuals earning more than £100,000 may have complicated tax affairs, even if their main income source is taxed under PAYE.

‘The UK tax system is self assessment, so taxpayers are responsible for identifying when tax is due or a return is required, which is not always obvious.

‘The main pitfall of not filing a tax return is that taxpayers may pay the incorrect amount of tax on an annual basis. Late payment interest and penalties may be charged by HMRC, for underpayment of tax and failure to file a tax return when one is strictly required.

‘Additional rate taxpayers are not entitled to the personal savings allowance, which charges savings income to a 0% rate of tax. Therefore, receiving a relatively small amount of bank interest, which could presently be achieved with very little capital in a savings account, would result in an income tax liability.

‘Alternatively, taxpayers may overpay tax if they fail to claim relief for personal pension contributions or for charitable gifts via Gift Aid, for example.’

The removal of tax returns is likely to result in an increase in HMRC’s use of penalties.

Jon Stride, vice chair of the ATT technical steering group, said: ‘If they don’t have to file a tax return, taxpayers may easily forget to tell HMRC about interest and dividend income and inadvertently underpay tax.

‘This could lead to interest charges and penalties if they are late in getting their tax positions up to date, or if HMRC find that they haven’t declared income.’

One of the risk areas is tax on savings, with a £500 savings interest tax free allowance for high earners.

Stride warned: ‘In a time of high interest rates, plenty of employees could find themselves with tax to pay on their savings. At current interest rates, savings of £10,000 which aren’t held in an ISA could easily give rise to a tax liability for a higher rate taxpayer.’

Changes to the dividend allowance also open up risks of tax liability.  

‘From April, if you have dividend income of more than £500 you will have tax to pay on that income if you’re an employee earning more than the personal allowance,’ Stride said. ‘Holding a few shares here and there is not unusual, and dividend information is not readily available to HMRC, so taxpayers will need to remember to contact HMRC to declare this type of additional income and arrange to pay tax on it.’

One way to ensure tax codes are correct is to amend PAYE codes but this will require interaction with HMRC, defeating the object of reducing use of HMRC call centres.

Todd added: ‘Whilst adjustments can be made to PAYE codes in respect of savings and investment income, pension contributions and charitable giving, making PAYE code adjustments may be time consuming and hard for taxpayers to keep track of.

‘Instead, it may be more straightforward for a taxpayer to review their tax position after the end of a tax year and continue to report these entries on a tax return for peace of mind.

‘Higher earners, in particular, should consider the use of ISAs to ensure that savings and investment income does not impact on their income tax liability or requirement to file a self assessment tax return.’

ATT said there will little benefit to HMRC in reducing the use of tax returns, and if anything it could put more pressure on HMRC’s already struggling customer service teams.