Many pensioners are experiencing confusion and concern over deductions made to their tax codes for untaxed savings interest, even when their annual interest earnings fall below the £1,000 Personal Savings Allowance (PSA). This issue has led some to believe they are being over-taxed, prompting questions about the accuracy of their tax codes and the response from HM Revenue and Customs (HMRC).
Steve Webb, a pensions expert and columnist for This Is Money, addressed a reader's query regarding these deductions. The reader and her husband, both receiving company pensions, noted that their savings interest was less than the £1,000 PSA, yet their tax codes included a deduction for untaxed interest. In the husband's case, this resulted in him paying a small amount of tax, which the couple believed was incorrect.
Webb explained that the PSA allows basic rate taxpayers to earn up to £1,000 in savings interest annually without it being taxed. Higher rate taxpayers have a PSA of £500, and additional rate taxpayers have none. For individuals whose total taxable income, including savings interest, falls below the standard personal allowance of £12,570, any savings interest earned is effectively not taxed.
In the case of the reader, her total income from her company pension was already below the standard tax-free threshold. Therefore, even with the addition of her savings interest, she would not have owed any tax. While Webb noted it would have been clearer if HMRC had either excluded the savings interest or explicitly included the PSA on her coding notice, the outcome for her tax liability was unchanged.
For her husband, the situation was slightly more complex. HMRC stated that his taxable income for the year, separate from his savings interest, turned out to be higher than they had initially forecast. Had they made a more accurate prediction, the PSA would have been factored into his coding notice, and no tax would have been deducted. Webb assured that such discrepancies are typically reconciled at the end of the tax year. The calculation would then add his company pension and untaxed interest, deduct his standard personal allowance and PSA, resulting in zero tax owed. Consequently, he is expected to receive a small tax refund automatically a few months into the new tax year.
An HMRC spokesperson commented that the department aims to prevent both overpayment and underpayment of tax. Tax codes are updated using the most recent data available, with efforts made to receive information from financial institutions in near real-time. The spokesperson confirmed that the reader's tax code was correct and that HMRC had apologized to her husband and updated his tax code, ensuring he would receive a refund for any tax overpaid. This clarification highlights the importance of individuals checking their tax codes and understanding their entitlements to allowances like the PSA.