Change in tax code. Why?

Steve_L

Two years ago, I noticed that my tax code on my BT pension P60 had changed from 1250L to 1238L. This is due to a reduction in my personal allowance of £113.00 for “"untaxed interest on savings & investments".

I wrote to HMRC, and  this refers to the year’s interest paid on my Santander 123 account. It’s a joint account, so my share is half of this.

I understand how this figure has been calculated.

The reply from HMRC was clearly written by someone who knows a lot about personal taxation. Unfortunately, they forgot that it would be read by someone who knows nothing.

I still don’t understand why anything has to be deducted from my personal allowance.

My latest P60 still shows my tax code as 1238L. his time due to a reduction in my personal allowance of £116.00 for “"untaxed interest on savings & investments". Again, this half of the year’s interest earned on my Santander 123 account.

At present, I don’t earn enough pension, savings interest or share dividends to exceed any of the relevant allowances, so all of this ia a bit academic. 

However, this will change on 10 June 2021, my 65th  birthday, when my state pension finally becomes payable, and my occupational and state pensions will exceed my personal allowance.

If my tax code remains at 1238L, then this means that my tax liability will start at £12.38?.00, not £12,500.00.

Of course, this assumes that nothing changes in the forthcoming year.

Secondly, I’ve had the Santander 123 account since 19 August 2016. The situation must apply from then, not just for the two years currently involved.

The root cause of all of this is the interest on the Santander 123 account. I’ve switched to a 123 Lite account, which doesn’t pay any interest. Interest rates are so low at present and it’s worth it to me to stop all the hassle and potential expense that the interest has created.

But my question still remains unanswered. Why did anything have to be deducted from my personal allowance?

Dazed_and_C0nfused

It is because, at the moment, your savings interest is covered by your Personal Allowance.

You are unable to benefit from the savings starter rate of tax (0%) and savings nil rate of tax (also 0% and commonly referred to as the Personal Savings Allowance).  The reason for this is that you have no need of them i.e. your total taxable income is less than your Personal Allowance.

They are only of use to people who have sufficient income.

When your State Pension starts HMRC will review your tax code and include a deduction for State Pension.  When that happens you will find that the deduction for interest is removed.  That is because your pension income (BT and State) will be using all of your Personal Allowance and as such your interest will be liable to tax.

The good news is that currently the tax rate will be 0% so no actual tax would be payable on the interest.

Jeremy535897

I can't think of any circumstances where you would need to reduce a code that includes a personal allowance, for a sum of interest that would be within the 0% band if OP's income was at any figure where personal allowance is available. It doesn't make sense.

Steve_L

I envy your obvious expertise in these matters.

OK, so my pension plus savings interest plus shares dividends is less than my personal income tax allowance, even the reduced one, which I still believe to be in error. So what?

This still doesn’t explain why something I’m supposedly not due to pay any tax on has to be deducted from my personal income tax allowance. If my personal savings allowance is not supposed to be used by people like me, who have insufficient income, then what difference can this make to my personal tax allowance? They're two separate things.

I’m afraid that, given the mistakes they’ve made with my tax in the past and are clearly making at present, my trust in what HMRC will do, when they’ve actually got sufficient income of mine to make mistakes with, is a lot lower than yours.

I’ve chosen to forego the interest on my 123 account, which should bring an end to this situation. I’m seriously considering selling my few Lloyds shares, to prevent the dividends suddenly becoming a similar problem in future as the Santander interest has done..Maybe I ought to stop dreading my 65th birthday, accept that their figures are probably wrong and accept that there’s nothing you can do about it, like everyone else.

Jeremy535897

Steve_L said:

I envy your obvious expertise in these matters.

OK, so my pension plus savings interest plus shares dividends is less than my personal income tax allowance, even the reduced one, which I still believe to be in error. So what?

This still doesn’t explain why something I’m supposedly not due to pay any tax on has to be deducted from my personal income tax allowance. If my personal savings allowance is not supposed to be used by people like me, who have insufficient income, then what difference can this make to my personal tax allowance? They're two separate things.

I’m afraid that, given the mistakes they’ve made with my tax in the past and are clearly making at present, my trust in what HMRC will do, when they’ve actually got sufficient income of mine to make mistakes with, is a lot lower than yours.

I’ve chosen to forego the interest on my 123 account, which should bring an end to this situation. I’m seriously considering selling my few Lloyds shares, to prevent the dividends suddenly becoming a similar problem in future as the Santander interest has done..Maybe I ought to stop dreading my 65th birthday, accept that their figures are probably wrong and accept that there’s nothing you can do about it, like everyone else.

You don't need to forego interest. A basic rate taxpayer can earn £1,000 interest a year without any tax being payable. With today's interest rates, that requires a serious amount of capital. You still need to get HMRC to alter your code even if you receive no interest. You can always make sure things are right by filling in a tax return after the tax year ends.

I don't think you will get your state pension until you reach 66, if you were born in 1956. You should check using the GOV.UK calculator.

Steve_L

I've already done it. It seemed to be the only way to "break the spell". It's worked before. HMRC did the same thing with my tax code before this, due to the reward payments on a Halifax account, and corrected the code to 1250L when I advised them that I no longer had the account.

I did wonder if you still need to send them a tax return, even though you don't earn enough to pay any tax.

I mistyped my age. I was born on 10 June 1955, so I'll be 66 on 10 June 2021. I've only had 11 days to get used to not being 64.  You don't do such rapid change well at my age.

Jeremy535897

If you owe no tax, you only need to file a tax return if you receive a notice to do so.

unholyangel

Jeremy535897 said:

I can't think of any circumstances where you would need to reduce a code that includes a personal allowance, for a sum of interest that would be within the 0% band if OP's income was at any figure where personal allowance is available. It doesn't make sense.

It's because there's still personal allowance available. 
If OP's pension income exceeded his remaining personal allowance, there would be no PA for it to deduct interest from.

Dazed_and_C0nfused

unholyangel said:

Jeremy535897 said:

I can't think of any circumstances where you would need to reduce a code that includes a personal allowance, for a sum of interest that would be within the 0% band if OP's income was at any figure where personal allowance is available. It doesn't make sense.

It's because there's still personal allowance available. 
If OP's pension income exceeded his remaining personal allowance, there would be no PA for it to deduct interest from.

100% correct but the op doesn't seem to like it understand that.

There have been several threads about this and people often have the mistaken impression they are somehow losing out on something or paying tax when none is due despite no actual tax being deducted!

unholyangel

Dazed_and_C0nfused said:

unholyangel said:

Jeremy535897 said:

I can't think of any circumstances where you would need to reduce a code that includes a personal allowance, for a sum of interest that would be within the 0% band if OP's income was at any figure where personal allowance is available. It doesn't make sense.

It's because there's still personal allowance available. 
If OP's pension income exceeded his remaining personal allowance, there would be no PA for it to deduct interest from.

100% correct but the op doesn't seem to like it understand that.

There have been several threads about this and people often have the mistaken impression they are somehow losing out on something or paying tax when none is due despite no actual tax being deducted!

How things are calculated for tax codes tend to especially cause confusion for people I think since people don't understand the distinction between the calculations for collecting liability under PAYE (tax code) and the calculations for assessing your actual liability at the end of year. 

For example, bik - shown in tax code as deduction to personal allowance but eoy it's added to taxable income.

Steve_L

But what is my personal allowance? £12,500 or £12,384? Not that I now care - see below.

Fortunately, my new second employer's pension, which became payable on 10 June 2020, willl bring my total pension income for this tax year, to £12.224.48 ! Sorry, HMRC, you'll have wait to mug me for another year.

Having to ask questions in the knowledge that you probably won't understand the answers is not a enviable position to be in. I believe that the actions I've taken will prevent the circumstances, ie. earning interest on savings, that created this mess from occuring in future. I will have to accept that whatever figures HMRC's random number generator comes up with are correct. I will have to accept that I don't have the knowledge to challenge them. The peace of mind and removal of the risk of a bout of depression this brings is worth more than any potential financial loss.

And I have enough to do advising everyone who needs to know of my new NI number they advised me of in their letter.