Big overpayment of tax caused by deducting interest from tax code

zagfles

This isn't a question, I've helped get the problem sorted, it's more a warning to others in case it happens to anyone else, as I'm sure it has and will until HMRC get this sorted.

I've just helped someone I know, a recent graduate, who was being taxed way too much. What happened was:

1) He started his first job in late Aug this year, on around £21k pa. No earnings earlier in tax year. All forms correctly completed and tax code set to 1250L in first payslip in Sept, all looked fine. His earnings this year would likely be below the personal allowance so no tax should be paid. 

2) In Oct, the tax code changed to 1240L M1 (non cumulative). Resulting in about £140 unexpected tax being deducted. No letter. Told him to log into his tax account and check. A deduction had been made to the tax code because the previous year, he'd got about £100 interest from a regular saver. Tax account showed his estimated income this year was around £11k. His estimated tax was zero. Yet they were taking tax off him.

3) I told him to update the estimated income to £13k, that should remove the totally pointless deduction of interest in his tax code. It did. However it didn't remove the M1, it went to 1250L M1, ie still non cumulative. So he still paid about £140 unnecessary tax again on his next payday.

4) I suggested ringing HMRC and insisting on a cumulative code, which he did. He waited in a 45 min queue. When he eventually got through, they changed it to 1250L (cumulative), and they explained the reason for the non-cumulative code was that when HMRC reduce tax codes, they usually change the code to non-cumulative to avoid a one off payment of back tax. Err...what? How could there possibly be any one off back tax amount in this situation when he's paid way more tax than he should have?

5) He waited till Dec payday when he eventually got back the £280 or so tax that the incompetantly designed PAYE system took off him.

All this would be so easy to fix in the PAYE system:

1) Stop deducting interest from tax codes of people expected to earn below the personal allowance. It is totally pointless.

2) Stop changing tax codes to non-cumulative when it's obvious that there won't be a big payment of back tax triggered.

molerat

HMRC operators must spend a great deal of (wasted) time dealing with these fairytale untaxed interest code corrections. Been there, done that this year !

calcotti

Interest of £100 wouldn’t create any tax liability anyway as it’s within the personal savings tax free allowance (and that’s without even considering the savings zero starting rate for those on a low income).

zagfles

calcotti said:

Interest of £100 wouldn’t create any tax liability anyway as it’s within the personal savings tax free allowance (and that’s without even considering the savings zero starting rate for those on a low income).

Indeed, that's the point. Yet the PAYE system will stupidly deduct interest from the tax code of people expected to earn less than the personal allowance, leading to the totally unnecessary problems in my OP

sheramber

 How could there possibly be any one off back tax amount in this situation when he's paid way more tax than he should have?
The computer wouldn't know that. When he updated online the computer would process the change. No human would be involved. 
Normally, when a code is reduced there will be an underpayment back to 6 April. Month 1 code prevents the tax due for previous   months being collected resulting in  large tax deduction.
When a month 1 code is  increased , if it was done on a cumulative basis the underpayment that arose back to 6 April, which was not collected because of the month 1 restriction, would be collected in the first pay after the change. That underpayment may be more than the overpayment resulting from   the subsequent increase in code. 
So, the computer is programmed to continue the month1 restriction.

 Stop changing tax codes to non-cumulative when it's obvious that there won't be a big payment of back tax triggered.
The computer has no knowledge of  whether there is a big payment of back tax or not. 
using the online method means accepting the restrictions it brings.

zagfles

sheramber said:

 How could there possibly be any one off back tax amount in this situation when he's paid way more tax than he should have?
The computer wouldn't know that. When he updated online the computer would process the change. No human would be involved. 
Normally, when a code is reduced there will be an underpayment back to 6 April. Month 1 code prevents the tax due for previous   months being collected resulting in  large tax deduction.
When a month 1 code is  increased , if it was done on a cumulative basis the underpayment that arose back to 6 April, which was not collected because of the month 1 restriction, would be collected in the first pay after the change. That underpayment may be more than the overpayment resulting from   the subsequent increase in code. 
So, the computer is programmed to continue the month1 restriction.

 Stop changing tax codes to non-cumulative when it's obvious that there won't be a big payment of back tax triggered.
The computer has no knowledge of  whether there is a big payment of back tax or not. 
using the online method means accepting the restrictions it brings.

Of course the computer would know. When it reduced the tax code from 1250L to 1240L, it was doing it because it thought income would be less than the personal allowance!! Otherwise it wouldn't have reduced it, would it, because interest would then be covered by the PSA, not the PA.

It also knows that income so far in the year was way under the proportion of the PA for the year so far, all this info is in the tax account, so a reduction in the tax code in this situation with a cumulative code would cause precisely zero tax to be deducted. Zero tax, zero back tax. Whereas using a non-cumulative code caused an incorrect £280 deduction of tax!

It would be simple for properly designed software to realise this. Plus realise that it is completely pointless deducting expected interest from the tax code of anyone expected to earn below the PA in the first place, which led to this unnecessary knock on problem.