Self-evidently, the UK tax system is very complex. What’s surprising, however, is that HMRC can’t program its computers to cope with all the permutations of rates and allowances that can apply in 2016-17.
The key problem is that the law allows an individual to use their personal allowance in a way that produces the lowest amount of tax payable. For earlier periods the personal allowance was generally allocated against a taxpayer’s income in the order:
1. earnings, pensions and profits
2. savings
3. dividends
But for 2016-17 that may not be the most advantageous allocation, as savings are taxed at 0% to 45%, dividends at 0% to 38.1% and other income at 20% to 45%. It may be beneficial to set the personal allowance partly against the dividend income, leaving savings income within the savings rate band to be taxed at 0%, and to set the rest of the personal allowance against earnings.
There are some permutations of allowances and types of income which HMRC had not anticipated, so its computer won’t accept the resulting tax computation as valid. In such cases the 2016-17 tax return and accompanying tax computation must be submitted in paper form, rather than electronically.
Please understand if we ask you to sign a paper tax return for 2016-17. This will only be required for one tax year, until HMRC reprograms its computers.
