Tax code reduced by savings interest -why?

Bill23h

Hi.
Just looked at my tax code for 19/20 and find it has been reduced by 'savings interest' of about £600. My normal 12500 allowance has been reduced by exactly the amount of taxable interest paid to me in 2017/18 tax year. Is this right?
I know this was untaxed income and should be part of my taxable income, but the point is:
a) Even with this £600, my income for the year didn't exceed my personal allowance for that year, and
b) Isn't the first £1000 of savings income supposed to be tax free anyway?
Is this a mistake, or some new legal ruse by HMRC? My income will increase this year as I start to get state pension, which will now be taxed more heavily as a result. I'm totally baffled by points a and b above - anyone know what's going on?
Thanks in advance.

Dazed_and_confused

Is this right

Based on your current circumstances yes.

a) Even with this £600, my income for the year didn't exceed my personal allowance for that year

If "that year" is referring to 2017:18 then that has no bearing on your 2019:20 tax code.

b) Isn't the first £1000 of savings income supposed to be tax free anyway?

Assuming you're are referring to the savings nil rate of tax (aka Personal Savings Allowance) then yes but not for the reason you think.

The savings nil rate only applies if your total taxable income is more than £17,500*. Before that it is covered by the Personal Allowance or is taxed at 0% courtesy of the savings starter rate of tax.
*this assumes you haven't applied for Marriage Allowance

So it looks as though HMRC currently think you have spare Personal Allowance which is making your savings interest not liable to any tax and your tax code reflects this.

When your circumstances change and your income increases this code deduction should be removed if the interest needs to be taxed but at one of the 0% tax rates.

Can you confirm that your current income from employment or pension (but not State Pension) is expected to be £11,900 or less?

And that your current 2019:20 tax code is about 1190L?

Bill23h

Many thanks for your help.
Current income is a company pension of about 10,200
Tax code just notified is 1181L

As far as savings goes, 18/19 will be a bit more than the £600, maybe 900. In 19/20 will reduce drastically as I've spent it!
State pension kicks in Jan 2020.

So do I have anything to I should act on?

Dazed_and_confused

Providing your company pension doesn't suddenly change to an annual amount of £11820 or more then no.

I think you will get a new tax code around the time your State pension starts and assuming this is going to be a few thousand a year then the interest should be removed from your new tax code.

The interest received in 2019:20 will still have to be taxed. But at one of the two 0% rates in force for savings interest this year

jackieblack

I’ve had the same.

I work part time and am paid less than the personal allowance. I received a new tax code lower than the personal allowance at the end of March (for 2019-20). When I rang them to ask why I was told it was because of savings interest, but still really didn’t understand why my tax code needed to be reduced :huh:. The advisor assured me that I wouldn’t end up paying any tax if my earnings remained below the personal allowance.
Since then I’ve had a small ‘cost of living’ rise and, because of the reduced tax allowance, was deducted a small amount of income tax despite my annual salary still being less than the personal allowance :wall:. I managed to increase my tax code by going online and entering the new salary amount into my online account, but my new tax code is still less than the personal allowance.
I guess if if I do any paid overtime (rare) I will have to go online and amend my estimated income again... ?
What a palaver! I have been working part time for over 20 years and never had this problem before! Why has it suddenly got so complicated!?

polymaff

Bill23h wrote: »

... anyone know what's going on?

Your story is a common one on MSE.

My understanding - please anyone correct me if you've had better luck at getting HMRC to admit or deny this - is that HMRC covertly introduced a system whereby they assume that your uncoded income, e.g. taxable savings interest, in subsequent years will be the same as the last time HMRC new what it was. The problem seems to be that whilst they forward-project income they don't forward-project allowances and then abuse PAYE coding to collect worst-case liability.

I have the same problem. My assumed uncoded income for 2019/20 - and for 2018/19 - are the same projected figures - and I know they won't turn out to be anything like the real thing.

As far as I can see, the only way to stop this abuse is to tell them to stop doing this and to insist on making a self-assessment return - which won't be too ferocious a job to complete if your affairs are that simple - and to remember to tick the box that tells them not to abuse your PAYE coding !

That's if they will still accept instructions to stop this abusive practice. I've been in SA for years, but did recently forget to tick the box and then had to call them to do this as once my SA was received by HMRC my Tax Code ballooned. They took, and acted upon, the instruction to put the code back to where it was - but even though that was only a year ago, times change...:(

Bill23h

Thanks a lot - you have put my mind at rest somewhat.
But I'm still a little confused by:-
"So it looks as though HMRC currently think you have spare Personal Allowance which is making your savings interest not liable to any tax and your tax code reflects this.

When your circumstances change and your income increases this code deduction should be removed if the interest needs to be taxed but at one of the 0% tax rates."

I'm struggling to understand why they (HMRC) bother to do this, if they are only applying it while nothing is payable? I guess I'm missing something crucial here? Anyway, grateful for your help, cheers

unholyangel

polymaff wrote: »

Your story is a common one on MSE.

My understanding - please anyone correct me if you've had better luck at getting HMRC to admit or deny this - is that HMRC covertly introduced a system whereby they assume that your uncoded income, e.g. taxable savings interest, in subsequent years will be the same as the last time HMRC new what it was. The problem seems to be that whilst they forward-project income they don't forward-project allowances and then abuse PAYE coding to collect worst-case liability.

You could always inform them of what the correct figures are. I believe they'll assume your finances will be the same year on year unless they're informed otherwise - whether that be by your employer, bank or you.

The alternative (to having it coded and therefore spread over the year) would be to complete a tax return at the end of the year, get a bill and pay it by the deadline. But PAYE exists because people aren't good at doing either of those things.

Bill23h wrote: »

I'm struggling to understand why they (HMRC) bother to do this, if they are only applying it while nothing is payable? I guess I'm missing something crucial here? Anyway, grateful for your help, cheers

AIUI, the personal savings allowance only applies to basic rate or higher rate payers (£1000 for the former and £500 for the latter). If you're not earning above the personal allowance then you are neither a basic nor higher rate taxpayer.

polymaff

Bill23h wrote: »

I'm struggling to understand why they (HMRC) bother to do this, if they are only applying it while nothing is payable? I guess I'm missing something crucial here?

Cash Flow. It looked like HMRC were going to take quite a hit when banks started paying taxable savings interest gross. At the time this was first announced I asked senior contacts in HMRC if they recognised this problem. Yes they did, and would introduce measures to mitigate the issue. Which can only mean attempting to work back toward the previous "tax deducted at source" cash flow.


And that is what is happening - and savers' hopes that they would hold onto that tax due until January 31st of the tax year following the one in which the interest was earned have more than gone up in smoke.


Now it is you that can end up giving HMRC an interest-free loan - not vice-versa..:(

Dazed_and_confused

Thanks a lot - you have put my mind at rest somewhat.
But I'm still a little confused by:-
"So it looks as though HMRC currently think you have spare Personal Allowance which is making your savings interest not liable to any tax and your tax code reflects this.

When your circumstances change and your income increases this code deduction should be removed if the interest needs to be taxed but at one of the 0% tax rates."

I'm struggling to understand why they (HMRC) bother to do this, if they are only applying it while nothing is payable? I guess I'm missing something crucial here? Anyway, grateful for your help, cheers

I think you may have misunderstood. Your current position and future situation once State Pension starts are different.

At the moment the savings interest does not need to be taxed as you have spare Personal Allowances. Your current tax code reflects the fact that some of your Personal Allowance is being used up by the savings interest.

And you have confirmed that this tax code is not going to result in any tax being deducted

Current income is a company pension of about 10,200
Tax code just notified is 1181L

When you start to get your State Pension you will no doubt no longer have any spare Personal Allowance so the savings interest will then have to be taxed. But from what you've posted the tax rate is going to be 0% so no extra tax is going to be payable.

Your new tax code should remove the interest deduction as the savings interest is no longer using any of your Personal Allowance and a different deduction to collect extra tax isn't required as the tax owed on the savings interest is £0.

So neither tax code should result in any extra (incorrect) tax from being deducted.

Bill23h

OK, thanks to all, especially D&C. The time and trouble taken with your replies are much appreciated.