Tax free savings affecting wife's tax code. Why?

smjxm09

My wife has given up part of her tax allowance in the form of a marriage allowance, as she works part time and is a non-tax payer. I would expect her tax code to be 1131N giving her a personal allowance of £11,310 but it is actually 963N, which my wife has been informed is correct.

As she is a non-taxpayer we have much of our non-ISA savings in her name so I was expecting she would have a starting rate of savings of £5000 plus a personal savings allowance of £1000 giving a total of £17310 of tax free income.

Now she was taking notes when talking to the tax office so this might not make sense but I can’t head my head  around her notes, which might contain errors.  She was told:

Interest without tax £1672

Untaxed interest £1649 that covers 10 accounts

 I note that £11310 - £1672 = £9638, which, matches the tax code 963N.  With a salary of £8559,  a pending back dated pay rise and rising interest rates I can see her wages and interest on savings surpassing her tax code but what has happened to her £6000 of interest on savings that she can have and why has those interest payments affected her tax code?

Dazed_and_C0nfused

She can't use those rate bands until she has used her Personal Allowance, which is only partly being used by her wages.

At the moment her interest is using those spare allowances.

If her expected salary was say £10,000 then she would only have £1,310 spare allowances and her tax code would be 100N (11310 - interest 1310).

The remaining interest would be taxed at 0% (savings starter rate).

If she thinks £8559 is too low for her expected P60 pay figure then she can change this on her Personal Tax Account.

But her tax code will retain an interest deduction whilst she had spare allowances (a smaller one but it won't disappear unless she has no spare allowances).

Albermarle

OP - You are not the first to come across this. Some people would say it is bug in the system (although the expert poster above disagrees) 
AFAIUI though in the end , she should not pay any more tax than she should do.

smjxm09

Thanks, so the bottom line is that if her wages are below £11301 she will remain tax free despite her tax code and she can still earn £6000 in interest on non-ISA savings.

Dazed_and_C0nfused

No, you've missed one thing.

Providing HMRC are aware of what her expected earnings are she won't pay tax unnecessarily.

If you did nothing and she earned say £11,300 then she would pay tax as her tax code is 963N.

So keeping her expected pay figure is key, but it will only be a problem if it exceeds £9,639.

If her pay ends up being say £9,000 then she can earn £8,310 in interest before any tax would be payable.

£2,310 uses her spare Personal Allowance
£5,000 is taxed at 0% (savings starter rate)
£1,000 is taxed at 0% (savings nil rate)

xylophone

See

 https://forums.moneysavingexpert.com/discussion/comment/79585658#Comment_79585658

And in particular how "helpful"  (I don't think) the HMRC rep was!

smjxm09

I have read the above link provided by xylophone, which is somewhat interesting and disturbing.

I understand the comment by Dazed_and Confused that you can only use the savings starter rate band and savings nil rate band once you have used all your Personal Allowance.

 Now my confusion. As my wife’s income from savings increases her tax code decreases.  To make things simple I have rounded figures off with hypothetical figures.

 Interest on savings now £4000

 Marriage allowance tax code 1130 - 400 = new tax code 730N. (Correction)

 New wage after pay rise £9000 meaning that £1690 would be taxed except with the savings allowance of £6000 she should not be paying any tax. 

 To resolve this she would ideally need to spot this in advance and contact HMRC who would do what as the tax code is correct?

As my wife's tax code was confirmed as being correct I can see a pending problem with rising interest rates.  So what happens if she speaks to the same person the next time?

Thanks in advance.

Dazed_and_C0nfused

You have misunderstood this somewhere along the way.  

If her taxable wages were expected to be £8,559 as per your original post then her tax code would be

Personal Allowance £11,310
Less Interest £2,751
Tax code allowances £8,559
Tax code 855N

And your figures makes no sense 😳

Now my confusion. As my wife’s income from savings increases her tax code decreases. To make things simple I have rounded figures off.

Interest on savings now £4000

Marriage allowance tax code 1130 - 400 = new tax code 7310N.

smjxm09

I have corrected that hypothetical tax code so thanks.

I appreciate you sticking with me but from having in my head what was going after you first reply I am now not grasping what must seem simple to you. 

Where has that "less Interest £2,751"come from, which has given a completely different tax code?

Going back to my hypothetical figures and my last corrected hypothetical tax code and a repeat of that question, which could be a scenario in the future. 

Interest on savings now £4000

 Marriage allowance tax code 1130 - 400 = new tax code 730N. 

New wage after pay rise £9000 meaning that £1690 would be in theory taxed with that tax code except with the savings allowance of £6000 she should not be paying any tax? 

 To resolve this she would ideally need to spot this in advance and contact HMRC who would do what as the tax code is correct?

As my wife's tax code was confirmed as being correct I can see a pending problem with rising interest rates.  So what happens if she speaks to the same person the next time? 

Thank you for helping an old F@rt

Dazed_and_C0nfused

Interest on savings now £4000

Marriage allowance tax code 1130 - 400 = new tax code 730N. 

That tax code would normally only be applied if her taxable wages were expected to be 7309 or less.

Tax codes are based on the latest facts when the tax code is calculated so if her expected taxable pay was £9,000 and her Personal Allowance was £11,310 it would mean she had unused allowances of £2,310.

If her estimates interest was £4,000 her tax code would be,

Personal Allowance £11,310
Less interest £2,310
Tax code allowances £9,000
Tax code 900N

xylophone

Providing HMRC are aware of what her expected earnings are she won't pay tax unnecessarily.

See my post above.

HMRC knew exactly what this lady's state pension and occupational pension were.

With regard to the Personal Tax Account, the interest details were hopelessly out of date (as the HMRC rep admitted).

And even had they been accurate, she shouldn't have been paying tax!