Untaxed Interest Deduction on Tax Code

Trev_666

My wife has just noticed that she has a £1,073 untaxed interest deduction on her tax code for the current FY. She is a non tax payer and gives me £1,260 of her allowance under the Marriage Allowance. She also receives a small occupational pension of about £2.7k.

The interest she earned last year was about £4k, and she does not submit an annual Tax Return.

Whilst she is unlikely to breach even her reduced personal allowance of £10,237 this year, it could affect her ability to earn savings interest tax free going forward.

I could ask HMRC for the reason, but I feel that I may get a more thorough understandable explanation on this forum. So, does anyone know why HMRC have reduced her tax code by £1,073 for this FY when she was nowhere near breaching her allowance last year?

Many thanks in advance.

Dazed_and_C0nfused

It's because that £1,073 is using up some of her otherwise unused Personal Allowance.

Whilst she is unlikely to breach even her reduced personal allowance of £10,237 this year, it could affect her ability to earn savings interest tax free going forward.

How have you come to that conclusion 🤔.

Trev_666

Dazed_and_C0nfused said:

It's because that £1,073 is using up some of her otherwise unused Personal Allowance.

Whilst she is unlikely to breach even her reduced personal allowance of £10,237 this year, it could affect her ability to earn savings interest tax free going forward.

How have you come to that conclusion 🤔.

Thanks for your response, but I am still confused as £1,073 looks like an arbitrary figure rather than it being directly associated with anything she has accrued. Good point about how I came to that conclusion... the reason I say this is in the event she comes into some inheritance from her mums estate which she would then invest. At that point, she could well breach her reduced personal allowance threshold.  

I guess the bottom line is; why is HMRC reducing her personal tax allowance when (in my opinion) there is no reason to do so.

Dazed_and_C0nfused

I don't understand why you are so concerned about a tax code???

HMRC aren't reducing her Personal (tax) Allowance, they are reducing her tax code allowances.  A tax code is just a provisional attempt to collect the correct amount of tax.  From what you've posted no tax is due and none is being deducted.

The actual position will always be reviewed after the facts are known once the tax year ends.

I also think you've got a bit confused about how tax on savings works.

The first thing step is that the Personal Allowance is used (£11,310 in her case).

Once that has been used she can use the savings starter rate band (£5,000 of interest taxed at 0%).

And only once that has been used can she use the savings nil rate band (£1,000 of interest also taxed at 0%).

If her non savings non dividend income (pensions, earnings, rental income, business profits etc) is no more than £11,310 then she will get the full £5,000 savings starter rate band.

Albermarle

 guess the bottom line is; why is HMRC reducing her personal tax allowance when (in my opinion) there is no reason to do so.

It does look a bit odd and has been mentioned before by other posters.

Best just to accept it as a quirk of how the system works. As said above it will not disadvantage her in any way.

Trev_666

Dazed_and_C0nfused & Albermarle - Thank you both for your explanations/comments. I accept that you are probably right and I should just forget about. I just wish there was more explanation about this deduction and how it was derived by HMRC on their site. Anyway, thanks again.

xylophone

See

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

https://forums.moneysavingexpert.com/discussion/comment/80263500/#Comment_80263500