HMRC Tax Code and untaxed interest

moneymania_987

I have some untaxed interest on savings. My PAYE income could well be zero for current tax year. My IFA advises I can receive £1,000 personal savings allowance, tax free, and the next £5,000 of interest would be taxable at the starting rate for savings, currently 0%. HMRC have issued a tax code that deducts my estimated untaxed savings interest from my personal allowance. This would mean any pension drawdown would be taxed much more severely until such time as I can reclaim the obvious overpayment. Based on past years when savings interest has been received it seems to take HMRC 9-10 months minimum to do the tax calculation. So, if I take drawdown early in the tax year, it appears it could be about 18 months before the tax overpayment is received. Surely it is wrong that the estimated untaxed interest is deducted from the personal allowance in the first place and that it should take this long to receive repayment?

eskbanker

You can advise HMRC of expected income via your online personal tax account, which should lead to them setting appropriate codes for PAYE income, so if you're planning to draw down pension income this tax year, then submit a realistic estimate for this. Obviously if you won't have PAYE income then it doesn't matter what your tax code is, as it's only used to drive PAYE deductions…

gravel_2

Have you tried contacted HMRC and explaining why you think the tax code adjustment is not appropriate? If they agree, they might just change the code for you.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81962607#Comment_81962607

It is an issue that comes up regularly for people earning below £12570. Their tax code is adjusted downwards for untaxed interest due to a quirk in the system. Once they earn above £12570, the adjustment disappears. I think that is how it works anyway.

If they stay on a low income they do not pay any tax anyway, so the tax code is not important.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/6664121/hmrc-tax-code-and-untaxed-interest

You have misunderstood one or two things.

If your PAYE income could well be zero then you have your whole Personal Allowance to use before either of the 0% tax bands kicks in.

If you do actually expect to have PAYE income, which includes taxable pension income (but not State Pension) then you just need to provide HMRC with an update advising them of how much you expect to receive by 5 April 2027 and they will adjust your tax code, often completely removing the untaxed interest reduction.

Has this pension actually started yet or have you yet to take the first (taxable) payment?

moneymania_987

https://forums.moneysavingexpert.com/discussion/comment/81962919#Comment_81962919

No drawdown in current tax year yet. I don't understand why HMRC deduct the untaxed interest amount from the personal allowance in the first place. My personal tax account already acknowledges that I have no PAYE employment.

eskbanker

https://forums.moneysavingexpert.com/discussion/comment/81962964#Comment_81962964

What income stream is the tax code to be used with? If it's the pension, just make sure that you give them a realistic estimate of this year's drawdown (or even just say it'll be £12,570) and all will be fine…

bjorn_toby_wilde

https://forums.moneysavingexpert.com/discussion/comment/81962681#Comment_81962681

I believe if there was untaxed interest in a previous year then HMRC’s software assumes it will continue. My tax code included untaxed interest last year but I had already moved the money into ISAs and pension. I phoned and persuaded them to remove it yet here it is again this tax year.

I amended through the PAYE section of the HMRC app this time. Counterintuitively, as Dazed_and_Confused pointed out, you remove it through the “add other income” link.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81962964#Comment_81962964

It seems to be just a by product of the HMRC system . It does seem odd, but in the end has little actual effect, if any.

moneymania_987

https://forums.moneysavingexpert.com/discussion/comment/81963669#Comment_81963669

What is the justification for HMRC making the deduction from the personal allowance when the untaxed interest is less than any amount upon which tax would be due?

masonic

https://forums.moneysavingexpert.com/discussion/comment/81964755#Comment_81964755

Presumably in case you start earning PAYE income. If you have none, then the tax code change has no effect for you.