How will the UK Self Assessment threshold changes affect you?

Up until the 2024-25 tax year, if you had PAYE earnings over a certain threshold, you had to file a Self Assessment tax return. The threshold was £100,000 until 5 April 2023, thereafter £150,000. The income threshold will be removed completely for the 2024/25 tax year and beyond.

This means that individuals whose only income is taxed via PAYE will no longer need to file a Self Assessment, provided they do not meet other criteria.

Reasons for the threshold change

The motive is simple. HMRC wants to reduce self-assessed individuals in the UK. So, they want to rely more on their tax-coding system.

What is the tax coding system?

The tax coding system is a payroll mechanism that dictates the employee’s entitlement to their allowance.

It also allows for adjustments to account for scenarios such as collecting tax on benefits in kind, concurrent employment and underpaid tax from a prior or current tax year.

For taxpayers with a gross income below £100,000, the tax code system works effectively for the most part. This is because the standard tax code of 1257L (equating to a personal allowance of £12,570) would likely apply to them.

However, if gross annual earnings exceed £100,000, the personal allowance is lost on a £2: £1 basis. So, those with incomes between £100,000 and £125,140 will lose part of the allowance. Those with earnings exceeding £125,140 will lose their allowance in full.

Potential for incorrect PAYE deductions

For taxpayers with a gross annual income over £100,000, the abolishment of the income threshold for self-assessment means that, if an incorrect tax code goes undetected, they will likely be notified of an over or underpayment only between June and November after the tax year. This is communicated to the taxpayer via a P800 calculation.

Suppose an underpayment has occurred, which is more frequent than an overpayment due to the progressive loss of the personal allowance, and the liability exceeds £3,000. In that case, HMRC will not collect the underpayment via the individual's tax code. They must pay the underpayment as a lump sum.

Incorrect tax code risks

The main issue that we foresee with the shift away from Self Assessment is that many people don't know how a tax code works. They also don't know the risks of an incorrect tax code.

There is a common, and often costly, misconception that if your salary is taxed via payroll, you’ve paid the correct amount of income tax.

Employees must check their tax code for accuracy and report any changes to HMRC. Payroll/HR and HMRC are not responsible for incorrect codes.

For example, an individual who earns a £125,140 salary but is on the standard 1257L tax code, meaning they’ve incorrectly been awarded the full personal allowance, will have an underpayment of about £5,028.

This is why it is important to familiarise yourself with your tax code and the meaning behind each number and letter during this transition time.

Our opinion

The earnings threshold offered people with relatively straightforward tax affairs a mechanism to understand their tax position without having to wait for HMRC’s input.

Those who sought professional assistance were also offered feedback on the cause of the underpayment and how to correct the tax code for future tax years.

Individuals without a government gateway will now have little option other than to brave the self-assessment helpline/webchat queues to resolve any issues or to request adjustments to their codes.

In summary, if it wasn’t broken, why fix it?

If you need accounting advice or would like us to assist with your Self Assessment tax return, contact us at accounting@sableinternational.com or call +44 (0) 20 7759 7553.