A bit of Truth on the 50p Tax Receipts

I’m usually quite a fan of Fraser Nelson, but his blog posting for the Spectator today is simply misleading and an example of the kind of sloppy journalism that editors are meant to be employed to prevent happening (see here).

It was written in response to the following tweet by John Rentoul (see here):

Where is @frasernels when you need him? The 50p income tax rate has brought in a ton of money; he said it would probably reduce revenue.

Fraser begins his argument by chiding John Rentoul and stating:

Were John self-employed, he’d know that the tax paid last month was in respect of the 2009-10 tax year – when the top rate of tax was 40p.

The argument that he then makes is basically advanced on this premise. Unfortunately this premise is quite simply not true and if he’d looked at his own return he’d of known that.

The payments made on 31st January by millions of people filing Self Assessment Tax Returns include the first of two payments on account relating to the current tax year 2010-2011, so do include the 50p in the £ tax rate.

Now this can be bit confusing, so maybe instead of intentionally misleading his readers rather than admitting he might of been wrong, maybe Fraser just got a bit confused. So this is how it works:

1. The tax year runs from 06 April to 05 April each year, currently 06 April 2010 to 05 April 2011.

2. You file your return by the 31st January after the year has ended, so your 2010-2011 return would be filed by 31 January 2012 at the latest.

Now you might assume you just pay all of your tax liability for that financial year, which is generally true if you’ve only been filing returns for one year, but if you’ve not, that’s not true. What happens is:

1. When you filed your return on 31 January 2011 for the year 2009-2010 the HM Customs & Revenue estimates, based on that return, your future income for the financial year you are presently in (2010-2011).

2. It breaks this payment down into two equal amounts the first of which you pay immediately on 31 January 2011, the second of which you pay by 31 July 2011.

3. Your payment on 31 January 2012 will include the difference between these Payments on Account and your actual tax liability determined by your return, plus the newly determined first Payment on Account for the current financial year (2011-2012).

If you want to read more (perhaps you’re tired and would like something to send you to sleep or your intentionally masochistic) you can do so here on the HMRC’s website.

Perhaps in the future the Spectator or Fraser himself could do some basic fact checking or research into the topic concerned before mouthing off.

* This post has been updated to make the following corrections:

  1. The term ‘self-employed people’ has been changed to ‘people filing Self Assessment Tax Returns’ after commentator BigC correctly pointed out that not only self-employed people file SA Tax Returns.
  2. References to the ‘Inland Revenue’ have been changed to ‘HM Customs & Revenue’ or ‘HMRC’ as commentator BigC pointed out the Inland Revenue and HM Customs merged in 2005 into a single entity.
  3. I’ve updated the link to the HMRC to point to the most recent document discussing Payments on Account, which I discovered whilst researching my reply to BigC.
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  • [New Post] A bit of Truth on the 50p Tax Receipts – via #twitoaster http://www.progressivechange.org.uk/2011
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  • Evan

    But where Fraser is right is that the tax payment for self assessment is calculated in arrears – and so, if someone earns more in the year for which tax is assessed and paid in Jan 11 than he does in the following year, there will be a repayment in 2012 to reflect the overpayment.

    So to claim on the basis of the first year that the 50% is raising more revenue is as misleading as to claim that it is raising less revenue. The truth is that we will not know for at least a year …

    • The 50p in £ rate was introduced in the last budget, therefore the Payments on Account (PoA) for the 2010-2011 year, 50% of which were paid on 31st January 2010 should of taken this into account.

      And yes I agree that the levels of those PoA are based on the tax liability declared in that return, if the income level was sufficiently high they would include a liability derived from the higher rate and it would be possible to see a rise.

      Either way, as there is a cap on NI payments and not on Income Tax the rise of NI receipts by only 4.2 % versus the rise in Income Tax receipts by 17.8% does indeed suggest that we can see the impact of the tax now.

      In the end you’re right though we’ll have to wait till next year to see the full impact of the new tax. Though I don’t excuse Fraser from just ignoring the PoA and won’t give him credit based on either a deliberate omission or one of ignorance.

  • BigC

    I love it when people try and sound knowledgable about tax, try to rubbish other people….and then get it WRONG themselves!!!!

    Quote: “The payments made on 31st January by millions of self-employed people include the first of two payments on account relating to the current tax year 2010-2011, so do include the 50p in the £ tax rate.”

    Firstly it’s HM Revenue & Customs. It hasn’t been the Inland Revenue since April 2005! (as you would have seen on your link….which incidentally is out of date!…try this one!…http://www.hmrc.gov.uk/sa/deadlines-penalties.htm#5)

    Secondly, the payments made on 31st Jan were not just by self-employed people; they were by Self-Assessment people, which also include PAYE employees & people with other forms of income (e.g Property, Trusts etc.).

    Thirdly, while the payments on account made in January and July are for the 2010/11 tax year, they do NOT take into account the 50% rate; they are each simply half of the 2009/10 liability (a year only charged at 40%).

    HMRC will not know how much 50% tax is due until you file your 2010/11 return and, as you then say, would be only payable by the end of January 2012.

    And echoing your final comment…..
    Perhaps in the future the YOU could do some basic fact checking or research into the topic concerned before mouthing off.

    • Firstly thanks for commenting BigC. I do appreciate all feedback, especially ones that help me correct any errors in my post!

      I’d firstly like to point out that I’m just a normal citizen who files a return, probably like yourself, unlike Fraser Nelson who is a professional journalist from whom I think it is reasonable to expect a more professional, researched approach.

      Now to address the points you raised:

      1. I did obviously research my post, hence the provision of links where the reader could check the facts for themselves, as you have. Now I used the following search query in sourcing my data:

      inland revenue payments on account via google.co.uk

      http://www.google.co.uk/search?client=safari&rls=en&q=payments+on+account&ie=UTF-8&oe=UTF-8&redir_esc=&ei=cMRmTeCrNtPB8QPLo4HJDQ#sclient=psy&hl=en&client=safari&rls=en&q=inland+revenue+payments+on+account&aq=f&aqi=g1&aql=&oq=&pbx=1&fp=76d9aa72ad96cc6

      If you search it yourself you will see the first result as the link I provided, now I did notice that this seemed out of date, however, the principle I was illustrating has remained largely unaltered since this document was introduced so I felt that it was reasonable to use to illustrate the point I was making, i.e. that the 50p tax rate would be in effect for Payments on Account.

      2. I am of course well aware that the Inland Revenue was merged with HM Customs to create HM Customs & Revenue in 2005, but most people I know still refer to the HMRC as the Inland Revenue when speaking about personal tax matters, as we’ve been doing it for a significantly longer period than the HMRC has existed. Though I concede that if had instead searched for:

      hmrc payments on account via google.co.uk

      I would have come across this document:

      http://www.hmrc.gov.uk/manuals/salfmanual/salf303.htm

      Which as opposed to your link, which deals principally with deadline penalties, actually discusses the structure of how Payments on Account work in detail.

      3. I perfectly understand that the payments are made by people who are required or choose to submit a Self Assessment Tax Return and this is not limited to the self-employed. I refered to the example of someone self-employed because this was the example that Fraser used and because this is my own personal experience, from which I was writing.

      4. I simply do not agree with your assertion that the 50p tax rate was not taken into account for Payments on Account, thought the example provided in the SALF303 document simply takes the two figures and divides them to produce the two 50% Payments on Account, it does not tell us what happens when tax rates increase and therefore change you expected liability for the subsequent year.

      So I defer my judgement to that of both Richard Murphy, an well-respected chartered accountant, and the economist Duncan Weldon who he refers to in the following post that both argue that the 50p tax rate has factoring into rising tax payments this January.

      http://www.taxresearch.org.uk/Blog/2011/02/23/the-50-p-tax-rate-is-raising-revenue-as-predicted/

      As to your point that HMRC will not know how much 50p rate would be paid in the subsequent year it is evidently false. The HMRC calculate your tax for you therefore they are perfectly able to calculate your Payments on Account to take into consideration the new tax rate and the new restrictions on Personal Allowances that have come into affect in the current financial year.

      In the end the question boils down to whether or not the rate was included for Payments on Account and to my knowledge HMRC has not confirmed this either way, though there has to be some explanation for why Income Tax receipts rose by such a pronounced level in contrast to the receipts from National Insurance Contributions.

      • BigC

        Ok, thanks for the corrections you made.

        Now dealing with some of your points…

        Quote: “4. I simply do not agree with your assertion that the 50p tax rate was not taken into account for Payments on Account, thought the example provided in the SALF303 document simply takes the two figures and divides them to produce the two 50% Payments on Account, it does not tell us what happens when tax rates increase and therefore change you expected liability for the subsequent year.”

        Payments on Account are simply based on the previous year’s liability; they take NO account of any tax rates whatsoever, whether it be 20%, 40%, 50% or 90%. They are calculated by simply dividing the previous year’s bill in half and then paying one half in January, the other half in July. Then when you submit your return, HMRC will work out the remaining tax you need to pay which you subsequently pay the next January. This 50/50 split is fixed and can only be changed downwards if your income has dropped.

        E.g. 09/10 liability £10000 (when you have paid max 40%)
        Your 10/11 payments on account will be 2 x £5000 =£10000
        (See? same amount as on 40% rate! No account of tax rate)
        The balancing payment would then make up the difference from the
        £10K you’ve already paid to what the total 10/11 liability is.

        These Payments on Account would be the same even if there was NO 50% rate, or indeed if the 40% rate had been dropped to 30%.

        Quote: “So I defer my judgement to that of both Richard Murphy, an well-respected chartered accountant, and the economist Duncan Weldon who he refers to in the following post that both argue that the 50p tax rate has factoring into rising tax payments this January.”

        I’m not arguing with Richard or Duncan that the 50% rate definitely hasn’t made a difference (maybe via the PAYE system), I’m just saying that the 10/11 Payments on Account and 09/10 Self-Assessment payments made in January have NOTHING WHATSOEVER to do with the 50% rate.

        Quote: “As to your point that HMRC will not know how much 50p rate would be paid in the subsequent year it is evidently false. The HMRC calculate your tax for you therefore they are perfectly able to calculate your Payments on Account to take into consideration the new tax rate and the new restrictions on Personal Allowances that have come into affect in the current financial year. ”

        HMRC cannot know or calculate how much tax will be due the next year UNTIL you file your tax return, which could be up to 10 months after the end of the tax year! If they already knew, what would be the point in completing a Tax Return? They probably would be able to estimate the Payments on Account to take into consideration a rise in the tax rate…BUT THEY DO NOT…. It is, as I said above, a fixed calculation for the Payment on Account whatever the rate of tax.

        Quote: “In the end the question boils down to whether or not the rate was included for Payments on Account and to my knowledge HMRC has not confirmed this either way, though there has to be some explanation for why Income Tax receipts rose by such a pronounced level in contrast to the receipts from National Insurance Contributions.”

        Payments on Account explained above…but once again….NO!

        The National Insurance/Income Tax divergence is a different query and comes from the fact that the NI rate decreases the more is earned (11% below about £44K p.a to 1% above £44K p.a.) whereas the Income Tax rate rises the more is earned (20% below £44K p.a rising to 40% above £44K and then 50% above £150K)

        I’ve tried to explain this as simply as I can, but don’t mean to offend. All I can say further to persuade you is that when talking about tax and HMRC, I speak from work experience.