Deductions from personal allowance

waveydavey48

Hi I won't be earning anything in this tax year. My DB pension starts in next tax year (21/22).
I intend taking an UFPLS payment from my DC pot this year to take advantage of my personal allowance. As my wife takes £1,250 of that allowance I assumed I could take £11,250 (that is £12,500 minus £1,250) without paying tax but when I have looked at my HMRC account it shows the following; 

"Deductions

• Marriage Allowance transferred to spouse/civil partner
  £1,250
  Update or removeUpdate or remove Marriage Allowance transferred to spouse/civil partner
• Untaxed interest on savings and investments
  £1,202
• Total deductions
  £2,452

Your total tax-free amount

The amount is £10,048"

I understand why the £12,500 is reduced by the £1,250 marriage allowance but hadn't realised that my interest on savings of £1,202 also came off my personal allowance.
I thought we were all allowed £12,500 pa and in addition £5k of savings interest before income tax applies.
I have sent HMRC an online query but I assume they are busy with COVID related queries so that may take a while.
Can anyone clarify please?  
   

Dazed_and_C0nfused

Your tax code looks correct from what you have posted.

You cannot make use of the £5,000 savings starter rate band or £1,000 savings nil rate band until you have used up your Personal Allowance.  So if your expected earnings/pension income is £0 then part of your Personal Allowance will be used up by the £1,202 savings interest.

One of the problems with drawdown is you can pretty much please yourself so it is impossible for HMRC to know what you might do in the future.

If you had earnings or pension income of £11,250 and your interest was due to be taxed at 0% there would be no interest deduction in your tax code.  If you earned more than £16,250 then there would be a small deduction to collect the tax due on the interest (usually £202).

waveydavey48

Dazed_and_C0nfused said:

Your tax code looks correct from what you have posted.

You cannot make use of the £5,000 savings starter rate band or £1,000 savings nil rate band until you have used up your Personal Allowance.  So if your expected earnings/pension income is £0 then part of your Personal Allowance will be used up by the £1,202 savings interest.

One of the problems with drawdown is you can pretty much please yourself so it is impossible for HMRC to know what you might do in the future.

If you had earnings or pension income of £11,250 and your interest was due to be taxed at 0% there would be no interest deduction in your tax code.  If you earned more than £16,250 then there would be a small deduction to collect the tax due on the interest (usually £202).

Thank you. So even though my earnings (apart from interest on savings) will be nil this year the most I can withdraw via UFPLS from my DC pot and not pay tax on will be £10,048? 
Have I got that right?

Dazed_and_C0nfused

No.  HMRC base your tax code on what they know.

At the moment you have no income other than the £1,202 so your tax code reflects that.

If you take £11,250 in taxable income from your pension fund you would be taxed* like this
Total income £12,452
Less Personal Allowance £11,250
Income to be taxed £1,202
It is most beneficial to you to use your Personal Allowance against the pension so it is the interest of £1,202 which will be taxed.
£1,202 x 0% (savings starter rate) = £0.00

*you may pay tax initially on the pension but if you take regular payments you can update HMRC with your expected pension income and if that is £11,250 they will remove the adjustment to your tax code.  You can only do this though after the pension has started to be paid.  The adjustment is correct based on your current situation.

waveydavey48

Dazed_and_C0nfused said:

No.  HMRC base your tax code on what they know.

At the moment you have no income other than the £1,202 so your tax code reflects that.

If you take £11,250 in taxable income from your pension fund you would be taxed* like this
Total income £12,452
Less Personal Allowance £11,250
Income to be taxed £1,202
It is most beneficial to you to use your Personal Allowance against the pension so it is the interest of £1,202 which will be taxed.
£1,202 x 0% (savings starter rate) = £0.00

*you may pay tax initially on the pension but if you take regular payments you can update HMRC with your expected pension income and if that is £11,250 they will remove the adjustment to your tax code.  You can only do this though after the pension has started to be paid.  The adjustment is correct based on your current situation.

Thank you, I do appreciate your help. One final point if I may.
This will be a one-off withdrawal as I will rely on my DB pension when it starts. After this withdrawal I will just be leaving the DC pot to grow. So this year only, I can withdraw £15k via UFPLS, the first 25% is tax free, the remaining 75% (£11,250) will be taxable but I will pay no tax as that sum equals my personal allowance.
Does that sound right?    

Dazed_and_C0nfused

waveydavey48 said:

Dazed_and_C0nfused said:

No.  HMRC base your tax code on what they know.

At the moment you have no income other than the £1,202 so your tax code reflects that.

If you take £11,250 in taxable income from your pension fund you would be taxed* like this
Total income £12,452
Less Personal Allowance £11,250
Income to be taxed £1,202
It is most beneficial to you to use your Personal Allowance against the pension so it is the interest of £1,202 which will be taxed.
£1,202 x 0% (savings starter rate) = £0.00

*you may pay tax initially on the pension but if you take regular payments you can update HMRC with your expected pension income and if that is £11,250 they will remove the adjustment to your tax code.  You can only do this though after the pension has started to be paid.  The adjustment is correct based on your current situation.

Thank you, I do appreciate your help. One final point if I may.
This will be a one-off withdrawal as I will rely on my DB pension when it starts. After this withdrawal I will just be leaving the DC pot to grow. So this year only, I can withdraw £15k via UFPLS, the first 25% is tax free, the remaining 75% (£11,250) will be taxable but I will pay no tax as that sum equals my personal allowance.
Does that sound right?    

That is what the final position will be yes.

But as a one off payment the pension company will deduct £3,457.80 tax and this will be refunded to you by HMRC later (assuming your only taxable income is the £11,250 pension and no more than £6,000 in interest).

HMRC will automatically refund the tax due back to you after the end of the tax year you take the payment in or you can fill in a form on gov.uk to claim it back sooner if you want (P53 or P55 I think).

Audaxer

I checked my personal tax allowance for 2020/21 earlier today, and I was surprised to see it has been reduced by £251 for "Untaxed interest on savings and investments". As my taxable interest over the last tax year was less than £1,000, I'm not sure why there is any taxable interest deduction from my personal tax allowance?

Dazed_and_C0nfused

It is probably because you are not not in a position to use the savings nil rate of tax (aka Personal Savings Allowance)

You have to have used your Personal Allowance and the savings starter rate of tax (upto £5,000 interest taxed at 0%) first so your total taxable income needs to be at least £17,250 before that £1,000 is available to you.

Is your taxable salary/pension income expected to be less than your tax code allowances?  If so then it is probably correct i.e. taxable salary/pension is say £9,000 and your tax code allowances are £9,000 or more i.e. tax code 900L/N/M or higher.

Audaxer

Dazed_and_C0nfused said:

It is probably because you are not not in a position to use the savings nil rate of tax (aka Personal Savings Allowance)

You have to have used your Personal Allowance and the savings starter rate of tax (upto £5,000 interest taxed at 0%) first so your total taxable income needs to be at least £17,250 before that £1,000 is available to you.

Is your taxable salary/pension income expected to be less than your tax code allowances?  If so then it is probably correct i.e. taxable salary/pension is say £9,000 and your tax code allowances are £9,000 or more i.e. tax code 900L/N/M or higher.

Thanks Dazed and Confused. My pension income was below the personal tax allowance last tax year as I only started taking one of the DB pensions near to the end of the tax year, so that must have been the reason. Yesterday I input the new figure for this tax year for that DB pension, and as that has taken me above my personal tax allowance I see that the £251 untaxed interest deduction has now disappeared, and it now shows no deductions from my personal tax allowance. I didn't realise that was how it worked, but glad it was that easy to resolve.

slenderkitten

Hi I've noticed this untaxed interest on savings and investments showing on my HMRC account. I don't earn alot. I have some savings but nothing more than £8k. Is this to do with the working from home covid £6 a week thing? 

Dazed_and_C0nfused

slenderkitten said:

Hi I've noticed this untaxed interest on savings and investments showing on my HMRC account. I don't earn alot. I have some savings but nothing more than £8k. Is this to do with the working from home covid £6 a week thing? 

Do you mean it is a deduction in your tax code?

If so that is quite normal for low earners.  The reason is that HMRC have calculated your tax code and believe that you won't be liable to pay tax on your earnings/pension and as such have spare allowances which mean your interest uses up some of those allowances.

If the end result is that the tax code means you still won't pay tax on your earnings/pension then it should be correct.