HMRC admits tax calculator was wrong

HMRC admits tax calculator was wrong

HM Revenue & Customs has fixed its self assessment tax calculator after the tax office was told it was incorrectly stating tax bills for withdrawals from life policies.

Top slicing relief applies to life policies and means if a client had a life policy which was held for 10 years, and paid out £40,000, then the cash amount is divided by the number of years held, to create a one-year value.

The tax band that this sum sits within is the band at which tax is paid for the whole amount. 

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Tim Good, a tax specialist, said he met with HMRC to highlight how, since changes were made to the personal tax allowance in 2010, the nation's tax office has been incorrectly calculating the tax liability, by excluding some higher rate taxpayers from the tax-free allowance to which they are entitled. 

Instead of top slicing relief being properly applied, Mr Good said individuals were being taxed on their income from the policy for the year in which it was taken - so in some cases, basic rate taxpayers have been taxed as higher rate taxpayers.

William Mahoney, a retired financial adviser, said he had a client who had been hit by this.

The client is a basic rate taxpayer, and with the calculation used by HMRC, would have moved into a higher tax band.

The impact of this is felt particularly because, since 2010, those earning over £100,000 do not receive a full tax-free allowance, but Mr Good's view is that HMRC's calculator is not accurately reflecting this.  

Mr Good urged advisers to challenge decisions from HMRC on the issue of tax liability on life policies.

He said: "My view is their calculator is wrong. They say it isn't. The decisions are being challenged and it is likely that there will be tax tribunals on this in the coming months."

But a representative of HMRC said the tax office had been aware of an issue with the calculator and this had now been fixed.

He said: "We have corrected our self assessment calculator to ensure top slicing relief is calculated correctly."

Speaking at FTAdviser's Tax Efficient Investing event in London, Neil Jones, market development manager of iCan at Canada Life, said HMRC did need to clarify their approach.

He said: "There is a lot of confusion around the top slicing allowance. The Association of British Insurers has been working with HMRC around this guidance.

"HMRC have got a lot of things on their plate at the moment but when we get guidance we will pass that on."