Tax code reduced due to savings interest

Mike564

Having spoken on the phone to HMRC, their explanation is this:
my expected income for this financial year is less than 12500. Their system, for reasons they don’t understand, takes this shortfall off your allowance and labels it “Untaxed interest on savings and investments”
To be fair, the representative was as exasperated as me.

Hammer_Time

I had exactly the same thing, like you my interest was less than £1000, and my pension was less than 12500 so any unused allowance was taken as untaxed interest. The bottom line is I will not pay any tax. This was confirmed after a phone call with the tax office. 

I believe if you had more than £1000 of interest the the other allowance would kick in.

Dazed_and_C0nfused

I have no idea why they could not explain this but the reason is quite simple.

It is because you are not able to use the £1,000 savings nil rate band (aka Personal Savings Allowance).

Most people need to have taxable income of at least £17,501 before this is available to be used.

For example if your company pension was £11,000 and you had untaxed interest of £400 and no other taxable income then your tax code should have a deduction if £400 in it.  Giving a tax code of 1210L.

This is because the savings interest of £400 uses up some of the unused Personal Allowance.  The £1,000 savings nil rate and £5,000 savings starter rate are of absolutely no use to someone in this situation.

With a pension of £11,000 and tax code 1210L no tax would be deducted.

If your pension amount changed significantly, for example you are in drawdown and increase the taxable withdrawal amount then your tax code would have to be changed if there was no longer any spare Personal Allowance.