Is my understanding of this tax code notice correct ?

CaptainSkeptical

Hi.  I'm hoping someone knowledgable about the tax system and deciphering tax code notices can assist.  We live in Scotland and my wife is retired and in receipt of a DB pension of £3,400 p.a. and drawdown from a SIPP of £8,400 p.a., i.e. £11,700 gross p.a..  She also has a savings account which last tax year earned £974 gross interest.  She has no other savings or investments attracting tax.  About a couple of weeks ago she noticed she was paying tax of approx £6.65 a month from her DB pension.  Our understanding was that as she was under the personal allowance of £12,750 and also under the personal savings allowance then she should not have been paying any tax at all.  She phoned HMRC and they said they'd sort it.  She's just received a tax code notice (snip below) showing 'less untaxed interest' as £170.  Does that mean that HMRC are taking tax from the £170 ?  I appreciate the sum involved is small but we don't understand what this notice is telling us and why they might think there is untaxed interest.


Thanks in anticipation.

Dazed_and_C0nfused

Don't think you've thought this through.

If her pensions are £3,400 and £8,000 and the respective tax codes are S400T and S840L who would now be deducting any tax 🤔

CaptainSkeptical

I don't know as the these notices bamboozle me   It's particularly the bit re 'less untaxed interest' that I don't understand - what's that about ?  I honestly have no clue.

Dazed_and_C0nfused

CaptainSkeptical said:

I don't know as the these notices bamboozle me   It's particularly the bit re 'less untaxed interest' that I don't understand - what's that about ?  I honestly have no clue.

Your wife has spare tax code allowances so the interest is using those.

Still not sure why you think any tax will be deducted or who will be deducting it though?

CaptainSkeptical

Frankly it's because I'm thick in relation to HMRC notices - the format and wording has always confused me, and still does.  And although you say she's got spare tax code allowance I don't understand where the spare tax code allowance came from or why they have a line about 'less untaxed interest' of £170  - their Note 2 on the back doesn't mention anything about spare tax code allowance.  Despite umpteen years of trying to understand HMRC tax code notices, I've failed miserably and suspect that will remain the case.  Ultimately all we were concerned about on this occasion is that she's not getting taxed when she shouldn't be, so many thanks for clarifying that.  Regards.

sheramber

Untaxed interest is covered by  excess personal Allowance before using the savings allowance. 

Thus 170 excess is deducted from the personal allowance

S400 means your wife can receive £4000 pension without paying tax.

S 840 means she can receive £8400 tax free. 

No tax will be payable and any tax already deducted will be repaid. 

CaptainSkeptical

sheramber said:

Untaxed interest is covered by  excess personal Allowance before using the savings allowance. 

Thus 170 excess is deducted from the personal allowance

S400 means your wife can receive £4000 pension without paying tax.

S 840 means she can receive £8400 tax free. 

No tax will be payable and any tax already deducted will be repaid. 

Thanks - much appreciated.

ppp123

The “less untaxed interest £170” line isn’t saying tax is being charged on it.

It just means HMRC are using spare personal allowance to cover a small amount of estimated savings interest, so they reduce the allowance shown in the code to make the maths work. No tax is actually due because her total income is still below allowances.

In other words: it’s an accounting adjustment inside the tax code, not a new tax charge — and any tax already taken should be refunded.

Shylock_249

I thought the "Less Untaxed Interest" figure was an estimate of untaxed interest paid by banks/building societies less the 1k PSA based on the interest received in the last FY year?

My Wife's P2 shows Less Untaxed Interest of £13005 which is calculated (I think) because in the last FY she received £14005 in interest, a figure agreed by her and HMRC. My figure is different because I only get £500 PSA.

If that is correct is it for consideration that HMRC are estimating that you will received untaxed interest of £1170.oo?

Dazed_and_C0nfused

Shylock_249 said:

I thought the "Less Untaxed Interest" figure was an estimate of untaxed interest paid by banks/building societies less the 1k PSA based on the interest received in the last FY year?

My Wife's P2 shows Less Untaxed Interest of £13005 which is calculated (I think) because in the last FY she received £14005 in interest, a figure agreed by her and HMRC. My figure is different because I only get £500 PSA.

If that is correct is it for consideration that HMRC are estimating that you will received untaxed interest of £1170.oo?

Your assumption is wrong.

That is a common scenario but not everyone can make use of the £1,000 savings nil rate band so it wouldn't be relevant.

Shylock_249

Dazed_and_C0nfused said:

Shylock_249 said:

I thought the "Less Untaxed Interest" figure was an estimate of untaxed interest paid by banks/building societies less the 1k PSA based on the interest received in the last FY year?

My Wife's P2 shows Less Untaxed Interest of £13005 which is calculated (I think) because in the last FY she received £14005 in interest, a figure agreed by her and HMRC. My figure is different because I only get £500 PSA.

If that is correct is it for consideration that HMRC are estimating that you will received untaxed interest of £1170.oo?

Your assumption is wrong.

That is a common scenario but not everyone can make use of the £1,000 savings nil rate band so it wouldn't be relevant.

Thanks. 

You've lost me. Certainly on my P2 the note for Untaxed Interest says this is an estimate of the interest you will receive.........

I wonder what the note says on the opening poster's P2?  If the OP only received £974 why would there even be an entry of "Less Untaxed Interest"?

Thanks again