Interest paid by banks and building societies has been paid gross since 6 April 2016. Basic and higher rate taxpayers have a savings allowance of £1000 or £500 to set against interest received, so in most cases the individual won’t have to pay tax on their savings income.
So why do HMRC insist on setting any unused personal allowance (PA) against small amounts of savings income in the taxpayer’s PAYE code? This is a waste of the PA, as in the vast majority of cases the interest will be covered by the savings allowance. For small company owners who receive more than £5,000 of dividends it would be more efficient to set the unused PA against dividend income.
Taxpayers are encouraged to access their personal tax account online to query any figures in their PAYE code, but the personal account doesn’t allow the taxpayer to reallocate the PA as they wish. The taxpayer would have to ring HMRC to request a reallocation of their PA. However, as a tax agent we can query our client’s PAYE code using an online form (see link), and include in the ‘reason for query’ box a request to reallocate the PA. This is a rare example of the tax agent being able achieve more online than the individual taxpayer.
The incorrect treatment of savings income has also surfaced in P800 tax computations issued for 2016/17. Where the taxpayer received interest with tax deducted in 2015/16, the same amount of interest, including the tax deducted, has been carried over to the 2016/17P800 computation. The fictional tax, which the computer assumes was deducted in 2016/17, is shown as being repayable to the taxpayer!
The P800 can be corrected by phoning HMRC, but you the taxpayer, or DFC as your accountants, need to spot the mistake first.