Tax code personal allowance

Dazed_and_confused

In addition to the links posted by vic_sf49 you can also see an explanation of how interest is to be used in a tax code when there are spare Personal Allowances in the link below.

Basically the tax code should show the interest. Exactly as the codes referred to in this thread appear to have done

https://www.gov.uk/hmrc-internal-manuals/paye-manual/paye11115

vic_sf49

Dazed_and_confused wrote: »

You are confusing your tax code and your Personal Allowance. Only someone with income in excess of £100,000 could have a Personal Allowance of £10,373.

You almost certainly don't have sufficient income to be able to make use of the savings nil rate of tax (commonly known as the Personal Savings Allowance).

If your tax code is 1037L and pension is £9,000 then you won't be paying any tax on the pension.

Can you explain what you think is wrong with the tax code?

OK, so my terminology is clearly in need of education, as is trying to understand what would happen with a 'lower' tax code, and additional income. Can you humour me with this hypothetical situation please.

Old tax code 1185L.
New one is 1037L.

Pension £9000.
Wages £2085.
Interest £1477.

I think I should pay zero tax (or tax at 0%, and yes that concept baffles me).

The new tax code makes it look like I would pay tax on £1477 of my income.

This thread has shown that HMRC have been unable to explain it on more than one occasion, but I'm no clearer after your last few posts Dazed....please have patience!

Mr_Pegs

Dazed_and_confused wrote: »

Initial thoughts. You have totally and utterly misunderstood your own tax position. And HMRC appear to have compounded this by not being able to satisfactorily explain why your tax code is correct.

First thing. Forget about the Personal Savings Allowance of £1,000. You cannot benefit from this. Simply because you have no need to.

You appear to be complaining to HMRC that they have sent you a tax code which will result in the correct amount of tax (zero) being deducted from your pension. Heaven help them if they ever send you a code which means you will pay the wrong amount of tax.

Your tax code is 1220L. You say your pension is less than £12,000. With a tax code of 1220L your pension company can pay you £12,209 by the end of the 2019:20 tax year and no tax would be deducted.

The reality is that your income is so low that your saving interest is not liable to be taxed because you have spare Personal Allowances available. After your Personal Allowance is used up you would move onto the savings starter rate of tax where upto £5,000 of interest is taxed at a 0% rate. Only after that does the savings nil rate (aka Personal Savings Allowance) apply.

If you update HMRC with details of the £660 interest you expect to receive in 2019:20 then the impact on your tax code will depend on exactly how much your pension is. If it is expected to be £11,840 or less then your tax code will be reduced by £660 from 1250L down to 1184L. And your pension company still wouldn't deduct any tax. It would be different if your pension was between £11840 and £11,999 but you still shouldn't end up with a tax code which results in any tax being deducted from your pension.

Perhaps you could explain exactly what it is about a tax code that ensures you pay the correct amount of tax (zero) concerns you so much?

'Initial thoughts. You have totally and utterly misunderstood your own tax position. And HMRC appear to have compounded this by not being able to satisfactorily explain why your tax code is correct'

The above comment you have made is spot on. I just wish the staff at HMRC had explained to me in the way you have I now understand better the tax codes thanks

Dazed_and_confused

OK, so my terminology is clearly in need of education, as is trying to understand what would happen with a 'lower' tax code, and additional income. Can you humour me with this hypothetical situation please.

Old tax code 1185L.
New one is 1037L.

Pension £9000.
Wages £2085.
Interest £1477.

I think I should pay zero tax (or tax at 0%, and yes that concept baffles me).

The new tax code makes it look like I would pay tax on £1477 of my income.

I really don't know why you think you would pay tax on £1,477?

Your tax code is 1037L. Your pension is £9,000.

Tax code 1037L means your pension company could pay you upto £10,379 by the end of the year without deducting any tax.

Anyway onto your hypothetical situation. If you got a job your tax code would have to be changed.

Using 2018:19 rates then yes you would be liable to be taxed on some of your interest but this would be at the savings starter rate of tax which is currently 0%

I think your tax codes would be calculated something along the lines of,

Personal Allowance £11,850
Less allowances used at job £2085
Less allowances used by interest £765
Allowances left £9,000

Tax code at pension = 900L (no tax payable)
Tax code at job = 208T (no tax payable)

Dazed_and_confused

The above comment you have made is spot on. I just wish the staff at HMRC had explained to me in the way you have I now understand better the tax codes thanks

Happy to help. Hopefully someone who understands tax codes will answer your complaint but maybe you will get a new tax of 1250L

But if so that begs the question what would they have they done to your tax records to send you an incorrect tax code, albeit one which keeps you happy!

vic_sf49

Dazed_and_confused wrote: »

Using 2018:19 rates then yes you would be liable to be taxed on some of your interest but this would be at the savings starter rate of tax which is currently 0%

^^ Thank you. You've probably said similar before, but the way you've written it there, has just sunk in. This is the reassurance that I was looking for, that I wouldn't be giving the tax man a (small) wad of cash, especially if I upped my income.

Dazed_and_confused wrote: »

Anyway onto your hypothetical situation. If you got a job your tax code would have to be changed.

I think your tax codes would be calculated something along the lines of,

Personal Allowance £11,850
Less allowances used at job £2085
Less allowances used by interest £765
Allowances left £9,000

Tax code at pension = 900L (no tax payable)
Tax code at job = 208T (no tax payable)

^^ Again, thank you Dazed. I didn't know that different tax codes would be applied.

You learn so much on this forum!

Mr_Pegs

vic_sf49 wrote: »

^^ Thank you. You've probably said similar before, but the way you've written it there, has just sunk in. This is the reassurance that I was looking for, that I wouldn't be giving the tax man a (small) wad of cash, especially if I upped my income.



^^ Again, thank you Dazed. I didn't know that different tax codes would be applied.

You learn so much on this forum!

I agree thanks just wish the employees at HMRC could be so precise. Think that is all for me now all been answered thanks to all who contributed

polymaff

Hmmm! Speak to n HMRC staffers, get n+1 opinions.

Heedtheadvice

I think polymath is being generous and the responses from HMRC tend towards a square law!����


I also think Dazed and Confused should be awarded thanks....by MSE as well as readers/posters for the clarity of explanation.


The way HMRC work and the way their masters create complex tax rules, now including responses to our uk geographic differences too, do not make it easy to understand by Mr & Mrs Average!


One thing that does help with understanding, especially with the 0% savings tax apparent nonesense and similar issues, is that all income needs to be totalled to then decide which rules apply to the individual's income as many allowances and rates depend upon that total income and therefore tax brackets. This applies most to higher incomes but also to low incomes too.


Presentation by HMRC is not good but in part this reflects the complexity of the tax system. They seem to be making more errors, some down to design of new systems (that gives little confidence!) some to lack of knowledge/understanding and communication could be much better. Unfortunately non of this is not improving, introductions to rectify and help create more problems and it seems evident that some HMRC staff must struggle too understand it too.

polymaff

The sad thing is that the current Income Tax legislation is reasonably simple. Even HMRC's grotesque implementations thereof still have a somewhat logical structure.

There is something seriously wrong with HMRC's internal training. Most processes are misunderstood in most organisations, but the ratio of confusion to complexity at HMRC is much greater than any other similar organisation I've come across - state or private.