Tax Enigma

tempus_fugit

Hi

My personal tax allowance calculation is getting more and more complex, probably partly due to the way I do things, but there are some elements that are confusing me.

To put you in the picture, I am 62 and have been retired for 6 years. I draw a small amount from my pension each year, plus I also put £2,880 into a SIPP and get the tax relief of £720 on that. I draw that back down each year as a UFPLS so £2,700 of it is taxable. In addition to this I have donated £1,260 of my allowance to my wife as she gets more in her pensions than I do at present. All of this is done within the remaining personal allowance.

So, I am very confused at what my personal tax account says for the current year. The summary is below:

Personal Allowance:                     £12,570

Additions
You do not have any additions:             £0

Deductions
Underpaid tax from previous year     £987 

(You underpaid £187 tax in a
previous year)

Marriage Allowance transferred      £1,260
to spouse/civil partner

Untaxed interest on savings               £390
and investments

Total deductions                              £2,637

Your total tax-free amount            £9,933

The bits I am confused about are the underpaid tax and the untaxed interest on savings and investments.

In the past five years I have not come anywhere near the personal allowance in my income/earnings, so I'm not sure where this underpaid tax is coming from, and usefully it only says "from a previous year" with no further explanation. Could it have come from an earlier year, perhaps, when I was still working?

And I thought I had a £1,000 allowance on interest on savings, which I have never reached, so the £390 deduction is very difficult to understand.

I will probably contact HMRC about this but I have no idea how easy that will be or how long it will take, bearing in mind it's not that easy at the best of times let alone now when everything is slow because of COVID etc. Does anyone have any ideas as to their reasoning here, or will I only find out by contacting them? They say that the tax for last year (2021-22) has not yet been calculated, so I'm wondering if some of it stems from that and the situation could change once that has been finalised, which means it could be months yet. Any ideas welcome before I try to contact HMRC about it.

Thanks

Dazed_and_C0nfused

That's your tax code allowances, not your Personal Allowance.

And I thought I had a £1,000 allowance on interest on savings, which I have never reached, so the £390 deduction is very difficult to understand.

There is no "allowance" as such for interest but there are two 0% tax bands.  The savings starter rate (upto £5,000 taxed at 0%) and savings nil rate (upto £1,000 taxed at 0%).  Confusingly the saving nil rate is commonly known as the Personal Savings Allowance.

Anyway you need to use your Personal Allowance in full before you can use the savings starter rate.  And you need to use the savings starter rate band in full before you can use the savings nil rate band.  

So in short it sounds like you cannot benefit from the £1,000 savings nil rate band, because you have insufficient income to need if.

If your PAYE income (earnings or pension income) is expected to be less than £11,310 then some of your tax code allowances will be used by your savings interest.

Did you get a new tax code during 2021:22 which might explain the (estimated??) tax underpayment?

tempus_fugit

Hi Dazed_and_C0nfused, thanks for your reply.

Can you explain the first comment? What's the difference between the tax code allowances and the personal allowance? I assume it's just showing how the personal allowance is used up by the relevant tax code(s) that have been allocated. At the moment I only have the one, S270T, which is for the SIPP.

Re the savings nil rate bands, so does that mean I only get the first nil rate band of £5,000 if I receive in income more than the amount specified in the calculation, i.e. £9,933? What if I receive, say, £9,900 and I get, say, £100 in savings interest? That would put me £67 above the available personal allowance. Do I then not get either of the savings nil rates and end up paying tax on the £67, or have I misunderstood how it works?

Re the underpayment, I had 2 tax codes at the end of 2021-22. One was S824N, which was for an employer that I did not earn any money from in that tax year (because the work was cancelled due to COVID). The other code was S BR X, which was for the SIPP.

Strangely, the tax account does show the £2,700 for the SIPP as being the only income received, and £352.41 tax as having been paid. However, I got that tax back via a rebate claim so I effectively paid no tax in that tax year.

tempus_fugit

I'm sorry but I still don't understand this. This is a summary of my income over the past 5 years, and I can't see where I have gone over the tax allowance. 



The only year I came close was 2018-19 but it was still below the allowance. For info, the marriage allowance transfer didn't start until 2020. I guess I will just have to contact HMRC about the alleged underpayment. It would be nice though if the HMRC website gave some clue as to why there is this underpayment.

The deduction for savings interest is also still confusing me. I know that this has to be taken into account but surely if I receive, say, £10,000 in income then that just pushes the savings interest estimate into the savings starter rate band, doesn't it? Or does it? I would really appreciate it if someone could explain this to me as it's not making much sense to me at the moment.

Thanks

P.S. Also, I think the £390 for the savings interest is a massive overestimate, given the interest rates these days, so I'm not sure where they came up with that amount.

Jeremy535897

Presumably your taxable pay figure for 2018/19 included the SIPP drawdown?

You should look at each tax year in your personal tax account to identify where the £187 comes from.

tempus_fugit

Jeremy535897 said:

Presumably your taxable pay figure for 2018/19 included the SIPP drawdown?

You should look at each tax year in your personal tax account to identify where the £187 comes from.

Yes, it does.

I've done that but it doesn't appear anywhere that I can see. The only place it could be, I guess, is last year (2021-22), which it says has not been calculated yet. But it seems wrong to say that I have underpaid tax for a year that the tax liability hasn't been calculated for.

I'll call them at some point to see if I can find out what this is for.

I'm still confused as to the savings interest part as well.

Jeremy535897

The personal tax account is not the friendliest system going. Open every conceivable page that might contain the answer, and if you still have no luck, contact HMRC.

The savings interest point is an oddity of the system, and if your pay suddenly increased to cause a liability to arise, the code would be adjusted.

tempus_fugit

OK, thanks. I'll be phoning them asap.

tempus_fugit

All sorted. It was on hold because they needed more info on the savings and investments interest. There seemed to be some old bank accounts on the system and when I told them they were no longer used, and gave them details of the actual interest I received last year that seemed to clear it and my account is no "at zero", i.e. there is no underpayment. I was surprised that it was so easily resolved and the lady on the phone was very helpful and thorough.