Low annuity & Tax free interest on savings, how to calc tax?

ajw1100

This post is regarding income tax and having savings registered as interest paid as gross, circumstances now changed as I now have an annuity.

When I was made redundant in December 2008, I was paid the statutory minimum after 36 years for the same company, they also paid me 3 months salary which was in my contract. The redundancy pay was free of income tax and I was taxed on the salary which in effect covered me for Jan/Feb/March. In my opinion I started the 2009~10 tax year with no income other than JSA started in January and which would cease around June/July.

I had no income, other than JSA from April 2009 until June 2011 when I received my first small annuity payment. I did have savings and as my income was non existent I registered to have interest paid gross.

Some of the savings were on fixed term interest rates and were taken out at different times, say Nov~ Nov for the 1 year P.O. Savings account with interest paid monthly and July ~ July for the 1 year Tracker Savings Bond with interest paid at maturity in August.

Come next April H.M.R.C are bound to ask me for details of my income. I would like to know how I can work out how much I will owe them, say my annuity is £500. per month, my interest from the P.O. savings was £1400. gross over the year plus £1250. from the tracker bond, there are small interest payments from other accounts.

Now, do I work it out as an 'average' tax free interest over the 12 months and apply the average to the months held in the tax year? Nov ~ March for one year and then April ~ Oct for the second year? Annuity £500. PM = £6000. P.O savings income (£1400. / 12 = £116.67 x 5 Nov~March = £583.35) plus tracker income (£1250. / 12 = 104.17 x 9 July~March = £937.53) My income would be £6000. plus £583.35 + £937.53. TOTAL £7520.88. Is this how it works? I have a tax coding of 592L which has been advised to my annuity provider.

Thanking you for any assistance!

getmore4less

The tax is due in the tax year it is paid.

if you want to spreadit you need to have it paid monthly

Mikeyorks

ajw1100 wrote: »

Is this how it works? !

No. As the previous post .... the interest is taxable in the tax year (6th Apr - 5th Apr) it is made available to you.

I have a tax coding of 592L

........ so there is £550, or thereabouts, restricted from your allowances for some reason? Is that additional untaxed interest / underpayment from a previous year or whatever? As it does mean you're comfortably over your personal allowance for the year and therefore underpaying tax if you haven't countermanded the R85(s) you filed to obtain gross interest.

ajw1100

Thank you for your replies, so, as I receive the P.O interest monthly then its just the relevant months that total up. But for the Yearly interest its the month it matures that matters.

Do you think I would be best to now register for income tax to be taken and allow HMRC to repay any overs or keep as tax free and send them a cheque when they have worked it out? I'd rather keep it and pay them as I understand they are rather slow at sending money back, but this may not be the option they want!

Thanks again.

CLAPTON

why do you have a taxcode of 592L?

Mikeyorks

ajw1100 wrote: »

But for the Yearly interest its the month it matures that matters..

That's right.

Do you think I would be best to now register for income tax to be taken and allow HMRC to repay any overs or keep as tax free and send them a cheque when they have worked it out?

You really have to de-register the R85s you've filed. It's not an option. The certificate you signed (or was implied if it's someone like Halifax who take R85s via 'phone and then write to tell you what you have signed up to) .... reads as follows :

If your income goes up, above your annual tax-free allowance, you must tell your bank or building society. It is not their responsibility to check that the information you have given on this form is true or up-to-date. Please note that we may check the information you have given.

Bear in mind - from the information given most, if not all, of the tax due above your personal allowance will only be at 10%. But it would be useful to know why your allowances are restricted - as that could impact.

ajw1100

Thank you Mike, I will contact the savings account providers starting next week! Your advice is appreciated.

My tax code was provided due to my advising HMRC of my tax free savings income, this came about after my annuity was purchased when the HMRC wrote to me asking for details on my income. I told them about the R85's then current. They calculated a figure of my allowance less gross interest and the result was 592L. In their letter they said they would review the taxing at the end of the tax year. This is why I want to get it sorted well before they start sharpening the axe!

CLAPTON

ajw1100 wrote: »

Thank you Mike, I will contact the savings account providers starting next week! Your advice is appreciated.

My tax code was provided due to my advising HMRC of my tax free savings income, this came about after my annuity was purchased when the HMRC wrote to me asking for details on my income. I told them about the R85's then current. They calculated a figure of my allowance less gross interest and the result was 592L. In their letter they said they would review the taxing at the end of the tax year. This is why I want to get it sorted well before they start sharpening the axe!

well if you cancel the R85 it's the HMRC that will probably owe you money

Mikeyorks

ajw1100 wrote: »

They calculated a figure of my allowance less gross interest and the result was 592L.

You have me puzzled. As - on the face of it - HMRC are tacitly accepting your R85s but then deducting the tax due from your gross interest via PAYE. Which is an odd way to do it? And - potentially - much less accurate (as you're estimating the interest via PAYE).

However. They're never going to get it right for you as - on the info provided - much of the interest should be tax free, with the remainder at 10%. And the PAYE system doesn't facilitate getting that right. You have to suffer the deductions at 20% - then reclaim at the year end.

In the light of what you have posted - leave the R85s in place until April. Otherwise you're paying the tax on (some of) the interest twice. The deduction for the interest (assuming you're under 65) is circa £550. Was that your estimate for 2011-12? As your dates don't suggest the deduction relates to interest / underpayment for an earlier year.

But I'd now leave the R85s in situ until April - then kill them off - then get HMRC to put your Code number back to the standard one. But you do then need to reclaim (R40) any excess tax back after 6.4.12 ........ as it does appear you will be owed some.

ajw1100

Gentlemen.
Copied from the letter from HMRC:

'Your new tax code of 592L for the year 6 April 2011 to 5 April 2012 is 592L.
Here is how we worked it out:
Your personal Allowance £7475
Interest without tax taken off (Gross interest) £1550
A tax free amount of £5925'

Then some asking if they have got it wrong (I would not know). They then go on to state that 'they turn £5925 into tax code 592L to send to my annuity provider. They should use this code with the tables they receive from HMRC to take off the right amount of tax each time they pay you'

I am age 63.

I believe the personal allowance will increase next year so this would help with the tax free interest.

I approached my IFA who, although having Tax Planning in his services said he could not assist me on income tax, he did however have a 'colleague' who would be pleased to help me, his colleagues fees, either hourly or as a retainer would very quickly eat up my interest! So this suggestion is not an option. I am sure, once I have the way to do it, work out a spreadsheet so I can enter the annuity payments, the gross interest and any net interest received to come up with a figure of my total yearly income.

I did not realise there was a 10% income tax, sound good to me. I will have a look at the HMRC web site to find out more on this.

Thank you for your help.

CLAPTON

have a go at working out yout total income this tax year

JSA for 2/3 month?
500 per month for 10 month (grossed up if necessary?
interest grossed ?