A recent case brought to light by former Pensions Minister Steve Webb suggests that Her Majesty's Revenue and Customs (HMRC) may be miscalculating tax bills for a significant number of individuals, particularly those with savings interest and dividend income. The issue emerged when a reader discovered she was being taxed on dividend income due to HMRC deducting savings interest from her personal tax allowance, a calculation that, according to her friend an accountant, was incorrect.
HMRC maintained that its computer-generated tax calculation was accurate, despite the reader's attempts to clarify the situation through written correspondence and phone calls. The reader had transferred the maximum possible amount of her personal allowance to her husband, reducing her own allowance to £11,310. Her savings interest for the year was £624, which is below the £1,000 personal savings allowance, meaning it should not have been taxed. However, HMRC’s initial calculation appeared to include this interest income in full, reducing the remaining personal allowance available for her dividend income and resulting in an unexpected tax liability.
Steve Webb, investigating the case, noted that such complex tax scenarios, involving the interplay of personal allowances, personal savings allowances, dividend allowances, and the marriage allowance, can lead to errors. In this specific instance, HMRC’s initial calculation failed to apply the allowances in the most beneficial order. The reader's pension income of £9,796, combined with dividend income exceeding the allowance, should have remained within her reduced personal allowance, resulting in a zero tax bill.
Upon intervention by Webb, HMRC reviewed the complaint and admitted the error. The reader received a refund for the overpaid tax and a £50 payment for “distress and inconvenience.” HMRC’s explanation indicated that the tax calculation had not correctly applied the beneficial ordering of allowances and reliefs related to bank and building society interest, thus not giving the taxpayer the full benefit of available savings income treatment.
This case raises concerns about the potential for widespread errors. HMRC revealed that over 100,000 cases required manual double-checking in the 2025-26 tax year due to scans suggesting that allowances might not have been applied in the most favorable order. An estimated 20,000 cases are expected to need similar manual processing in 2026-27. While HMRC stated such cases are rare and that changes are being made to reduce the need for manual processing, Webb advises individuals to review their tax calculations for accuracy, especially those with modest incomes and untaxed savings interest.
HMRC has stated that it has apologized to the reader, confirmed the refund and redress payment, and is implementing changes to minimize future errors. The agency acknowledged that its initial computer-generated calculation was incorrect in this instance. The situation underscores the complexity of the UK's tax system and the importance of vigilance by taxpayers in verifying their tax assessments.