Tax Code affected by Untaxed Savings Interest

[R1200GS]

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

[robbob]

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.

Good luck trying to get any sense out of hmrc , all i would say is the coding computer only does what its told - so i would guess this is likely to be some error if its included in your tax code IF you have not previously had higher interest received total that lead hmrc to believe an adjustment may have been in order - as you say there should only adjust your tax code if they expect interest over the £500/£100 level OR you are in the marginal rate where you pay extra tax despite the income being tazed at 0%.
Feel free to challenge them and they should remove the entry from you current year code if its not appropriate.

[R1200GS]

Thank you for your reply. It has given me the impetus to question this with HMRC. I wonder if I was foolish in declaring the untaxed interest on the P53 tax refund claim form although I think HMRC get these figures direct from banks and building societies.

[D&C]

I think the issue here is a misunderstanding on how interest is taxed.

I suspect that the op is not able to benefit from the savings nil rate band (aka Personal Savings Allowance) or the savings starter rate band because their expected income is less than the (Marriage Allowance reduced) Personal Allowance of £11,250.

In which case the interest is using up some of the unused Personal Allowance and the tax code is entirely correct.

If they (HMRC) were expecting the op to get pension or wages income in excess of £11,259 then there would be no deduction in the tax code as one or the other of the savings rate bands would apply. But based on what the op has posted they don't.

[D&C]

Final figure should have been £11,250 not £11,259

[R1200GS]

D&C
Many thanks for your response, which has also been covered in a response from someone on the HMRC Community Forum albeit it is a little confusing (for me), but it would concur with your response:
"Hi, The £1000.00 Savings Allowance is given to taxpayers, as your income is below the tax threshold you do not get the Savings Allowance.
HMRC however, makes sure that no matter the amount of interest, £999.99 or £18.00 that by adding it to your code the reduction will still not make you a taxpayer.
This heavily relies on HMRC having the correct estimated pay.
Currently the interest deduction should not change the level of tax taken from you as you should remain tax free.
If your circumstances change and your income for the year increases to the point that your £18.00 deduction will cause you to pay tax, then it shall be reduced or removed to the point that you remain tax free.
HMRC suggests that you contact the helpline or webchat if your circumstances change."

I was not aware that as a non-tax payer, I would not get the savings interest allowance and I am assuming that the £18 is subtracted from my personal allowance to ensure that I effectively pay tax on this amount. The sentence above, "If your circumstances change and your income for the year increases to the point that your £18.00 deduction will cause you to pay tax, then it shall be reduced or removed to the point that you remain tax free", I find confusing. Any idea how or who does the reducing or removal process? When I look at my Gov.uk personal portal, it clearly states that the amount I can earn before I start to pay is reduced by the savings interest figure. I am therefore not clear how "...it shall be reduced or removed to the point that you remain tax free".

Chris
ps does 'op' stand for old person?

[D&C]

Op is original poster not old person

You are overthinking this and contradicting yourself

I was not aware that as a non-tax payer, I would not get the savings interest allowance and I am assuming that the £18 is subtracted from my personal allowance to ensure that I effectively pay tax on this amount

If you don't have sufficient income you cannot use either of the savings nil rate bands. As a Marriage Allowance applicant you have to have at least £16,251 in taxable income before you even get to the level of needing the savings nil rate (aka PSA).

What is making you think reducing the allowances in your tax code is making you effectively pay tax? This is at odds with you saying you are a non taxpayer.

Are you paying tax or not?

If your expected pension (or wages) in 2020:21 is going to be less than £11,240 then tax code 1123N will ensure no tax is deducted.

[R1200GS]

Hello D&C
Thank you for the clarification of OP! Your assumption that I am overthinking is correct, but it comes from a basic lack of understanding and poor responses from HMRC who don't seem to know the answers to my questions.

I am not expecting to pay tax right now and I am not currently paying tax, my question relates to the reduction in my potential to earn tax-free income in the remainder of this tax year and the strategy that HMRC adopt with regard to reducing my personal allowance. If I look at my Personal Tax Account pages, it shows that the remaining amount of my personal allowance (£7,879) has been reduced by the £18, so I would assume that if I earned £8,000, for example, in this tax year, that I would have to start paying tax on £121.
The response from the HMRC Community Forum seems to suggest that this is not correct and if I receive income that takes me above the remaining amount of my personal allowance, that the £18 "...then it shall be reduced or removed to the point that you remain tax free". That's confusing to me.

[D&C]

You need to remember your tax code will be based on the latest information available, HMRC do not have a crystal ball.

So if your expected taxable income is going to be less than your Personal Allowance then the interest will use up some of that Personal Allowance.

If circumstances change however and you expected to get say taxable pension income of £8,000 then you wouldn't have unused Personal Allowance and the savings interest would all then be liable to tax. But you would have the majority of the savings starter rate available so it would £18 taxed at 0%. If that situation arose your tax code could be revised so that the interest deduction was removed.

But until that occurs your tax code sounds correct. The timing of the tax code would depend on when HMRC become aware your expected income changed, nowadays you can often make such an update through your Personal Tax Account.

I think you are getting a bit confused about your Personal Allowance and your tax code allowances. The only way you can have a Personal Allowance of £7,879 is if your adjusted net income was well in excess of £100k.

Whatever is reducing your tax code allowances from £11,250 down to £7,879 may or may not be important but without the full breakdown of your tax code its not possible to know for certain.