tax code changed due to untaxted interest on savings and investiments

NotTightJustCareful

My tax code has been dropped by a small amount approx £100 due to untaxed interest on savings and investments.  In the last tax year I put a a large portion of my wages into my pension by salary sacrifice so as to bring my taxable pay down to the personal allowance of £12570 ensuring I paid myself above the living wage rate - I work part time btw. The interest I earned in the year is way below even £1000 , but should I not be entitled to £6000 should I not with the starting rate for savers for £5000 applicable because of my taxable salary ? I will be contacting the tax office but I was wondering if anyone can clarify that my reasoning is correct?

Dazed_and_C0nfused

NotTightJustCareful said:

My tax code has been dropped by a small amount approx £100 due to untaxed interest on savings and investments.  In the last tax year I put a a large portion of my wages into my pension by salary sacrifice so as to bring my taxable pay down to the personal allowance of £12570 ensuring I paid myself above the living wage rate - I work part time btw. The interest I earned in the year is way below even £1000 , but should I not be entitled to £6000 should I not with the starting rate for savers for £5000 applicable because of my taxable salary ? I will be contacting the tax office but I was wondering if anyone can clarify that my reasoning is correct?

Don't waste your time.

HMRC will almost certainly have estimated your earnings to be less than £12,570, leaving some spare allowances which are used by the interest before either of the 0% tax rates are used.

If you have a more up to date estimate of your taxable earnings then all you need to do is update this on your Personal Tax Account and HMRC will automatically review your tax code.  If there are no spare allowances then there won't be a tax code deduction (assuming no tax is expected to be owed on the interest).

NotTightJustCareful

Why would they estimate my income for the past year when they have access to what I was paid through PAYE? Looking on the HMRC site the figure they have is £77 below what I actually earned. I don't understand why the adjustment was made for untaxed on savings and interest as I got nothing like a £1000 in interest in the last year, never the £6000 if the starting rate for interest is included. Tax isn't fun

Dazed_and_C0nfused

NotTightJustCareful said:

Why would they estimate my income for the past year when they have access to what I was paid through PAYE? Looking on the HMRC site the figure they have is £77 below what I actually earned. I don't understand why the adjustment was made for untaxed on savings and interest as I got nothing like a £1000 in interest in the last year, never the £6000 if the starting rate for interest is included. Tax isn't fun

It's because the 0% rate bands don't come into play until your allowances have been used.

So if they estimated your earnings as £12,493 you would often have £77 allowances unused.  And in the absence of my other income the first £77 of interest uses those allowances.

If your earnings were estimated as £12,570 there would be no spare allowances.

HMRC have to guesstimate what you will earn in the forthcoming tax year and this often happens in January or February before the tax year starts so they will be basing the estimate on what you had earned after 9 or 10 months of the tax year that has just ended.

At the end of the day it's an estimate and if you can provide a more accurate figure then you just need to update this on your Personal Tax Account.

NotTightJustCareful

Thanks for putting me straight. I didn't know your first point. so I will do as you say and update HMRC with what I actually earned which was  less that a hundred above the personal allowance. I hope that will trigger a correction to my tax code. Thanks for you for help on this..

Dazed_and_C0nfused

NotTightJustCareful said:

Thanks for putting me straight. I didn't know your first point. so I will do as you say and update HMRC with what I actually earned which was  less that a hundred above the personal allowance. I hope that will trigger a correction to my tax code. Thanks for you for help on this..

It should do yes, not sure exactly how fast it is but I suspect if you check again in a couple of days you will see an updated tax code.

NotTightJustCareful

Updating my expected gross earning before tax did trigger an revaluation of my tax code back to 1257L , Thank you Dazed_and_C0nfused

Dazed_and_C0nfused

NotTightJustCareful said:

Updating my expected gross earning before tax did trigger an revaluation of my tax code back to 1257L , Thank you Dazed_and_C0nfused

Useful to get the update on what happened 👍

RL11

So basically, if you tell HMRC you expect to earn £12,570, it will stop all of this messing about with tax code changes and waiting to claim tax back etc. Is that a legit thing that anyone can do? I mean, it is actually a win/win for HMRC and the non-taxpayer

eskbanker

RL11 said:

So basically, if you tell HMRC you expect to earn £12,570, it will stop all of this messing about with tax code changes and waiting to claim tax back etc. Is that a legit thing that anyone can do? I mean, it is actually a win/win for HMRC and the non-taxpayer

It's a legit thing to do if that represents a more realistic estimate of your projected taxable earned income than what HMRC have used; less so if it's an attempt to manipulate the system, although ultimately it all comes out in the wash anyway, even if tax is temporarily overpaid, which isn't as often as many seem to think.

zagfles

eskbanker said:

RL11 said:

So basically, if you tell HMRC you expect to earn £12,570, it will stop all of this messing about with tax code changes and waiting to claim tax back etc. Is that a legit thing that anyone can do? I mean, it is actually a win/win for HMRC and the non-taxpayer

It's a legit thing to do if that represents a more realistic estimate of your projected taxable earned income than what HMRC have used; less so if it's an attempt to manipulate the system, although ultimately it all comes out in the wash anyway, even if tax is temporarily overpaid, which isn't as often as many seem to think.

Or an attempt to get the system working properly. If earnings/pension will be under £12.5k and savings income will be under £6k there is never any point in HMRC adjusting your tax code for interest, as no tax will ever be due on it. That's the point of a tax code, to collect the right about of tax, not to reflect how much PA is available, so pedantry about PA being used before PSA/starter rate is just not relevant. No tax is ever due on the first £6k of savings interest if other income is below £12.5k (or £11.3k if MAT applied for).

So adjusting the tax code to account for interest in these circumstances is utterly pointless. Yet HMRC still do it. Maybe they wouldn't have to come up with desperate ideas like closing the SA helpline for 6 months (even if they did go back on it) if so much staff resource wasn't wasted on dealing with issues like this which would be relatively simple to fix with software changes in PAYE

So if, say, your earnings look they'll be £11k, but there's a possibility you'll do £2k of overtime, then estimate £13k. Or same if your pension will be £11k but you might draw £2k from a SIPP etc. Then as long as interest doesn't take total income over about £18.5k, you'll pay the correct amount of tax regardless of whether you do the overtime or not.

But if you estimate £11k and you do do the overtime, you'll be overtaxed. So just give the estimate which will result in correct taxation regardless. As above, a win/win for the taxpayer and HMRC as no time will be wasted with pointless corrections.