Personal Savings Allowance guide

ramaken50

Although I'm still working part time, I've just started to claim my state pension after deferring it for 15 months. I haven't yet had the DWP options letter but unless something changes I intend to take the extra pension rather than lump sum. In making that decision I used the new gov.uk Personal Tax Account site to look up what information HMRC holds and how they use that to work out my tax code. There were a few things that didn't seem quite right to me so I used the options there to tell them and subsequently received a letter of explanation. To me the explanation was no help so I called them.

I was surprised by their approach to the personal savings allowance which just seems designed to create more work for them and me so I thought I would share my experience and see what others think and this seems to be a suitable forum.

In working out my tax code, HMRC have added their estimate of £500 savings interest to my income and then to balance this they have added £500 to my tax code.

I'm a standard rate tax payer, so should have a £1000 allowance and assumed that any interest I earned up that amount would have no impact on what tax I paid or how it was worked out. I queried why there was any reference to savings interest in my tax account and was assured that what I saw online is indeed correct and that's the way they will work out tax codes for everyone.

To me that seems to quite a bonkers way of not collecting any tax. I now have to work out how much interest I will get and ensure that the figures are corrected at the end of the tax year which means more work for me and for them!

I have no idea how they conjured up the number although I have read that banks and building societies do have to report interest to them so maybe they have a number from previous years. I haven't previously filled in a tax return or told them any other way for many years.

My wife and I are both bank account tarts and (thanks to Martin!) have set up various money go rounds to make the most interest from our cash savings. That's worked very well for us but now it seems that I have to go back to some of the account's we've closed during the year to get interest statements from them so that I can check the figures at the end of the tax year.

Before I get down to the calls, emails and number crunching involved in working out whether I owe HMRC or they owe me what may turn out to be a small amount, I wonder if anyone can save me the time by sharing an insight that I obviously don't have.

Consumerist

It's very difficult to be specific unless the intimate details of your circumstances are known but the fact that you have only been given a £500 Personal Savings Allowance suggests that HMRC believes that your total taxable income for the year will make you a higher-rate taxpayer for 2016/17.

Since you have only recently started to draw your pension, you will need to combine your salary and pensions income since April 2016 to arrive at the total income from which your marginal tax rate will be determined for 2016/17.

I agree that the PSA arrangements are a mess but you will need to keep a record of all interest payments during the tax year if you want to check HMRC's figures.

polymaff

ramaken50 wrote: »

..

Can you ask specific questions, ramaken? The only comment I can make to your lengthy out-pouring is that after decades in tax accountancy, I judge that the gap between HM Treasury's spiffing ideas and HMRC's attempts to understand and implement them has never been wider. You are, I suspect, being bamboozled by one aspect of this divergence.

HMRC's key ambition is to get as much tax in as soon as possible, That's why we have have payments on account - soon to be expanded - and had tax deducted at source for the three income streams - taxable non-savings, taxable savings and dividend income. HMRC were tightening this up every time they could - and then George Osborne crashed their plans by introducing gross payment of and nil-rate bands for taxable savings income (SRA and PSA) and dividends (DA). What you are experiencing is, I suspect, HMRC's attempts to get back to getting the most tax out of you as soon as possible - and what better justification for doing so than by making assumptions based on previous income - they say.

And it won't get any better. MTD is just a smokescreen for getting even more tax in even sooner. HMRC reveal this to be so by publishing highly suspect statistics "showing" how many tax-payers would welcome the opportunity to pay tax as it becomes due (if not sooner?).

SNAFU !

ramaken50

Thanks Consumerist, I made the same assumption initially, that HMRC had worked out that I was a higher rate tax payer and given me the lower limit. I don't want to be exact about my income but including the the full year state pension, another pension and part time earnings my total income is under £43k. They have all my income details correctly on the personal tax account site showing that.

I asked them specifically whether the £500 was the higher tax rate limit and was told no, that I would could have a further £500 of savings interest and the code would be adjusted at the end of the year as necessary.

I'm, inclined to agree with polymaff that this is just a way for HMRC to get as much money in as early as possible and that it is indeed SNAFU.

Dazed_and_confused

ramaken50


In working out my tax code, HMRC have added their estimate of £500 savings interest to my income and then to balance this they have added £500 to my tax code.

I'm a standard rate tax payer, so should have a £1000 allowance and assumed that any interest I earned up that amount would have no impact on what tax I paid or how it was worked out. I queried why there was any reference to savings interest in my tax account and was assured that what I saw online is indeed correct and that's the way they will work out tax codes for everyone.

But if your interest is estimated as £500 then you will be entitled to a personal savings allowance amount of £500, you would only get £1000 if you at least £1000 interest.

Do you actually believe you are paying more tax
earlier or do you realise this isn't the case for yourself?

Don't forget as well it's not really an allowance but a new 0% rate band as all savings interest (ignoring non taxable stuff like ISA's) is still taxable.

Some lower income people aren't even going to be entitled to any personal savings Allowance e even if they have interest.

Consumerist

Dazed_and_confused wrote: »

. . . But if your interest is estimated as £500 then you will be entitled to a personal savings allowance amount of £500, you would only get £1000 if you at least £1000 interest.
. . .
Don't forget as well it's not really an allowance but a new 0% rate band as all savings interest (ignoring non taxable stuff like ISA's) is still taxable.

Some lower income people aren't even going to be entitled to any personal savings Allowance e even if they have interest.

Ok. I think I get that.

If interest received is estimated at £500 for the year, a PSA of £1,000 on top of the normal Personal Allowance would effectively give you another £500 of tax relief on other (non-savings) income.

colsten

Consumerist wrote: »

Ok. I think I get that.

If interest received is estimated at £500 for the year, a PSA of £1,000 on top of the normal Personal Allowance would effectively give you another £500 of tax relief on other (non-savings) income.

I don't think it works like that. Any unused PSA won't be transferred to your Personal Allowance. The PSA is strictly only for tax relief on interest.

polymaff

Dazed_and_confused wrote: »

Some lower income people aren't even going to be entitled to any personal savings Allowance e even if they have interest.

It's important not to confuse entitlement with ability to exploit. All individuals whose adjusted net taxable income does not cause them to be liable to additional rate income tax have an entitlement to PSA. Whether they have the income to exploit it is an entirely different issue.

polymaff

Consumerist wrote: »

If interest received is estimated at £500 for the year, a PSA of £1,000 on top of the normal Personal Allowance would effectively give you another £500 of tax relief on other (non-savings) income.

colsten wrote: »

I don't think it works like that. Any unused PSA won't be transferred to your Personal Allowance. The PSA is strictly only for tax relief on interest.

Yep, a Personal SAVINGS Allowance only relieves Taxable SAVINGS. Likewise the DIVIDEND Allowance.

It's different with the Personal Allowance. This relieves Taxable Non-savings, Taxable Savings and Dividend income - and the SRA/PSA/DA are only exploited once the Personal Allowance has been fully exploited

http://forums.moneysavingexpert.com/showpost.php?p=70422918&postcount=9

Consumerist

colsten wrote: »

I don't think it works like that. Any unused PSA won't be transferred to your Personal Allowance. The PSA is strictly only for tax relief on interest.

Agreed. I wasn't suggesting that HMRC would allow that but what it would mean, in effect, if they did allow it.