New MTD Digital Tax Exemption Rules Announced! Winter Fuel Payments to Be Taxed; UK economy showed surprise 0.5% growth
- TBA
- Apr 20
- 6 min read
2.2m pensioners will pay tax on winter fuel payments
Under a controversial new policy on Winter Fuel Payments, state pension recipients with total annual income exceeding £35,000 will have an average of £200 in payments automatically clawed back through the Pay As You Earn (PAYE) tax code system. Those not using PAYE will need to declare and repay the amount through their Self Assessment tax return.
Data from HM Revenue & Customs (HMRC) shows that around one-fifth of retirees have incomes above this threshold. Although the government insists that “Winter Fuel Payments themselves are not directly taxed,” in practice the full amount will be recovered through the tax system, effectively functioning as an income tax charge.
Official HMRC figures indicate that the new policy will affect approximately 2.2 million recipients aged 65 and over with incomes above £35,000.
Among them:
Around 1.3 million are PAYE-only taxpayers (many of whom still have employment income). The system will automatically recover the £200 payment by adjusting their tax code;
About 900,000 will need to file returns themselves (including 800,000 who also have PAYE income), declaring the amount through annual Self Assessment or the Making Tax Digital (MTD) system;
For the self-employed (around 100,000 individuals), the tax treatment will be more complex and may require professional advice.
HMRC stated that the amounts will be recovered through the tax system in the following tax year. For PAYE taxpayers, this will be treated as an “implicit tax burden,” equivalent to about £17 per month in the first year. By 2027–28, this could rise to around £33 per year due to the recovery of two years’ worth of payments, before returning to a standard annual adjustment thereafter.
For those filing under Self Assessment, HMRC will typically pre-populate the payable amount in the tax return system. If it is not automatically included, taxpayers will need to enter it manually.
Before the policy change (in the 2023–24 tax year), around 11.6 million retirees received Winter Fuel Payments, which were then a universal benefit.
Under the new policy introduced by Chancellor Rachel Reeves, the system will shift to a “pay first, reclaim later” model: everyone will still receive the payment upfront, but only those with annual incomes below £35,000 will ultimately be allowed to keep it.
HMRC has acknowledged that the new mechanism may cause confusion. It plans to issue clearer guidance, improve communication, and pre-fill relevant data in tax returns to reduce errors. At the same time, it warns that some taxpayers will still need to check and report the information themselves, as failure to do so could affect tax compliance and potentially lead to further issues.
HMRC clarifies MTD exemption rules and year one waiver
HM Revenue & Customs (HMRC) has recently updated its guidance on Making Tax Digital (MTD) for Income Tax, aiming to clarify previous confusion around certain exemption rules—particularly for taxpayers claiming averaging relief in the first year of implementation.
Clearer Scope of Exemptions
The updated guidance sets out more clearly the categories of taxpayers who may qualify for exemptions, including:
Individuals who are physically or mentally unable to provide financial information to HMRC;
Those who do not have a National Insurance (NI) number;
Non-UK resident taxpayers who use the SA109 supplementary page when filing their tax returns.
The guidance also includes new references to the 2025–26 Self Assessment tax return, partnerships, supplementary pages used to claim averaging relief, and permanent exemptions for members of Lloyd’s.
First-Year Automatic Exemption Limited to One Year
HMRC confirms that some taxpayers will receive an automatic exemption in the first year of MTD implementation. However, this exemption applies for one year only.
From the 2027–28 tax year onward, these individuals will be required to comply fully with MTD rules, when the income threshold will be reduced to £30,000.
Cases Where Quarterly Reporting Is Not Required in Year One
For the first year of MTD (2026–27 tax year), HMRC states that taxpayers will not be required to submit quarterly updates if, in their 2024–25 Self Assessment tax return, they meet any of the following conditions:
Claimed averaging relief using the SA103 (individual) or SA104 (partnership) supplementary pages (applicable to farmers, market gardeners, or individuals producing literary or artistic works);
Claimed qualifying care relief (e.g. foster carers or kinship carers);
Included the SA107 supplementary page to report income from trusts or estates;
Included the SA109 supplementary page to report residence status and foreign income, and were non-UK residents.
Taxpayers meeting these conditions only need to complete their 2025–26 Self Assessment tax return as usual by 31 January 2027, with no further action required. HMRC emphasized: “If you qualify for these exemptions, you do not need to contact or apply to HMRC.”
Application Required for Non-Automatic Exemptions
Taxpayers who are not automatically exempt but believe they qualify must apply directly to HMRC, either by phone or in writing. HMRC aims to respond within 28 calendar days, although processing may take longer if additional information is required.
Phased Rollout and Application Timeline
As MTD expands to include more lower-income landlords, sole traders, and self-employed individuals, HMRC has outlined a phased exemption application schedule:
Wave one taxpayers: Can apply now but must do so before the key quarterly deadline of 7 August 2026;
Failure to secure approval by this date will result in mandatory inclusion in MTD for the 2026–27 tax year;
Wave two (income above £30,000): Effective from 6 April 2027, with applications opening from summer 2026;
Wave three (income above £20,000): Expected to open for applications from summer 2027.
Penalties Still Apply Under Existing Rules
In a separate update, HMRC confirmed that even if taxpayers benefit from a one-year MTD exemption, existing penalties for late filing and late payment under the Self Assessment system will still apply.
Although there will be no penalties specifically for MTD non-compliance in the first year, other penalties remain in force. HMRC also stressed that if an exemption application or appeal is unsuccessful, taxpayers must continue to maintain proper records and supporting documents as required under Self Assessment rules.
UK economy showed surprise 0.5% growth
The latest official data from the UK’s Office for National Statistics (ONS) shows that the British economy performed better than expected ahead of escalating tensions in the Middle East, recording solid growth.
In the three months to February, the UK’s gross domestic product (GDP) grew by 0.5%, with the economy also expanding by 0.5% in February alone. GDP is the key measure of a country’s economic size and total output.
However, revised figures released by the ONS last week indicated that there had been no economic growth in the three months to December.
Services Sector Drives Growth
ONS Chief Economist Grant Fitzner said the February expansion was largely driven by growth in the services sector, which accounts for the largest share of the UK economy.
In particular, wholesale trade, market research, hospitality, and publishing performed strongly in the three months to February, making significant contributions to overall economic growth.
Government Welcomes Data
Chief Secretary to the Treasury James Murray welcomed the figures, stating: “Growth only happens when the economy is on a solid footing. In a changing global environment, our plan to restore stability, boost investment, and deliver reform will help build a stronger and more resilient Britain.”
He also noted that at the International Monetary Fund meetings in Washington, the Chancellor outlined plans to further enhance the UK’s competitiveness, reduce costs for households and businesses, and cut energy bills for businesses by up to 25%.
Growth Exceeds Forecasts but Remains Modest
Economists surveyed by Reuters had forecast growth of just 0.1% for February, making the actual figures significantly stronger than expected. Despite this, overall GDP growth remains relatively modest, even as the government continues to prioritise economic expansion.
Outlook Clouded by Global Risks
More concerning is the sustainability of this growth. Although the current Middle East conflict has entered a temporary two-week ceasefire, markets widely expect the situation to have a greater negative impact on the UK economy than on other major economies.
With rising external uncertainties and ongoing weakness in certain domestic sectors, the UK’s economic outlook remains challenging in the months ahead.
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