While every attempt will be made to ensure that information provided is accurate at the time of publication, it should be treated as guidance only and does not constitute legal or professional advice. Tax law and guidance changes frequently and readers are advised to consult the current relevant product for the most up-to-date information on this topic.

The introduction of the savings nil rate and dividend nil rate from 2016/17 onwards complicated the existing income tax calculation because advisers had to re-learn the basics they thought they already knew, such as how to allocate the personal allowance and other deductions in the most tax efficient manner. It is suggested that you read the Changes to the taxation of savings and dividends for individuals [updated] news item to familiarise yourself with the concepts before continuing.

However, this has also led to unforeseen problems for HMRC. The Self Assessment online filing parameters set by HMRC, which all the tax software providers must follow, mean that individuals with certain fact patterns should file their 2016/17 Tax Returns on paper rather than online. Although those Returns can be filed online (and will not be rejected), in these situations the taxpayer will pay more tax than is necessary if the Return is filed online due to the calculation errors in the parameters set by HMRC. It is not possible to 'fudge' the software in order to get the correct result; a paper Return is the only option.

Which Returns should not be filed online?

Any individual who falls into either of the categories below should file a paper Tax Return for 2016/17:

Situation Comment Maximum difference in tax due
Non-savings income of less than £16,000, with savings income in excess of the starting rate for savings and the savings nil rate band In this situation, the personal allowance is set against the non‑savings income as usual and, depending on the level of taxable non‑savings income, some or all of the starting rate for savings is available as well as the savings nil rate band (as long as the taxpayer is not an additional rate taxpayer). However, the tax software does not apply the starting rate for savings in this scenario, leading to the difference in tax due. See Example 1 Filing the 2016/17 Tax Return on paper and correctly utilising the starting rate for savings will save the individual up to £1,000. The precise saving will be the starting rate for savings band remaining multiplied by 20%
Total income of over £145,000 where the 
non-savings income or savings income is between £27,000 and £32,000 and the balance is dividend income
In this situation, it is the dividend nil rate band which causes the problem. The tax software treats the dividend nil rate (that actually sits within the basic rate band) as being deducted from the higher rate band. This means £5,000 of dividend income is incorrectly taxed at the dividend additional rate of 38.1% rather than the dividend upper rate of 32.5%. See Example 2 Filing the 2016/17 Tax Return on paper and correctly taxing the dividend income will save the individual up to £280 (£5,000 x (38.1% – 32.5%))

See exclusions 51 and 52 of the HMRC Self Assessment individual exclusions for online filing 2016/17.

In the table above, 'non-savings income' means income which is neither savings nor dividend income.

Does that mean these Returns must be filed by 31 October 2017 to avoid a penalty?

Unless the notice to file the Tax Return was issued late, the normal deadlines for filing Self Assessment Tax Returns are:

  • 31 October following the end of the tax year (paper submission)
  • 31 January following the end of the tax year (three-month extension for online filing)

TMA 1970, s 8(1D)

Any Tax Returns which are filed late are subject to an automatic £100 late filing penalty unless the taxpayer has a reasonable excuse. 
FA 2009, Sch 55, para 3

If the Return cannot be filed electronically because it falls into one of the HMRC exclusions it can be filed at any time up to and including 31 January after the end of the tax year without attracting a penalty, because the taxpayer has a reasonable excuse. Where the paper Return is submitted after 31 October, it should be accompanied by a reasonable excuse claim. Note that the form, originally published in 2008, has not been updated to reflect that the law on reasonable excuse for late filing is now contained in FA 2009, Sch 55, para 23. If, exceptionally, a late filing penalty notice is still received despite the proactive claim for reasonable excuse, it should be appealed within 30 days of the date of the notice using form SA370
FA 2009, Sch 55, para 20

What if the Return is filed online by mistake?

As discussed above, there is nothing which prevents you from filing the 2016/17 Tax Returns for affected individuals online. The online submission will not fail. Therefore it is easy to see how the Tax Return could be filed online by mistake.

Filing such Returns online mean that both the tax due for the 2016/17 tax year and the payments on account calculated for the 2017/18 tax year will be incorrect.

If the Return is filed online it is not possible to amend the Return online and resubmit, as you would do in the case of other amendments to online Returns. This is because the tax software thinks the Return as filed is correct.

The only way to amend the Return is to file a paper amendment showing the correct figures for boxes 1 and 11 of the Tax calculation summary supplementary pages (ideally supported by a tax calculation) and include a covering letter to explain that the original calculation submitted online was incorrect due to the error in the HMRC online filing parameters.

This course of action has been confirmed as acceptable by the HMRC Press Office.

Why does the tax software not provide a work around?

HMRC has had problems setting the online filing parameters for 2016/17 due to the complexity of the starting rate for savings, savings nil rate band and dividend nil rate band and the interaction of these with the tax efficient use of the personal allowance and other deductions. Whilst most were ironed out in time to be included in the Self Assessment online filing parameters used by the tax software providers to code their products, the issues discussed above remain outstanding.

It is important to realise this is not the fault of the tax software providers. Their software must follow the HMRC parameters or else none of the online Tax Returns prepared using that software will be accepted by HMRC. They have had no choice but to code their products to give the incorrect answer.

What about 2017/18 Tax Returns?

HMRC states that these issues will be fixed such that the 2017/18 Tax Returns can be correctly filed online. HMRC Self Assessment individual exclusions for online filing 2016/17, exclusions 51, 52 (see final column)

What do you need to do?

It is essential that you brief your staff to spot these categories of taxpayer and ensure that they review the tax calculations prepared by the tax software critically, since it may not be clear that the taxpayer is affected until all the figures are entered into the software.

You may wish to add this to your preparer / reviewer Tax Return checklists to ensure this is considered prior to online submission.