I have recently completed a claim for, and received, an income tax refund for a personal pension plan that I cashed in at the start of May 2020. The notification that I received (form P800), outlined the details of my claim and the figure that I would receive as my tax refund. The explanatory notes on the P800 form list, amongst other things, 'Untaxed interest" of £18. Although not the figure that I originally declared on my refund claim form (P53), I understand that this is untaxed interest from my bank's savings account. I give a marriage allowance of £1250 from my personal allowance to my wife, who is working. So, I was expecting my tax code to be 1125N, but no, it's 1123N as the £18 is deducted from my personal allowance, (12,500 - 1,250 - 18 = 11,232 = code 1123N). Now that all seems plausible, but I do not understand why the figure associated with untaxed interest is deducted from my personal allowance given that the figure is way below the threshold for how much untaxed interest I can earn before I am taxed on it. I appreciate that £18 is a small amount to worry about, but if I had earned £999 untaxed interest, I would still not be taxed on it, and my personal allowance would reduce to £10,251, which doesn't seem right to me as the amount of income I can earn tax free is being unfairly reduced by something that is not taxable. The effect of a reduced personal allowance obviously means that I have a reduced earning potential before I have to pay income tax, which is a concern for me as a retired person of limited income.
When I queried this with someone from HMRC they couldn't give me a full answer and said, 'that's the way it works'. Can anyone help me understand this more fully please? I do not normally complete a self assessment form.
Many thanks.
Chris
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