The 10 per cent Savings tax rate / Married Couples Allowance

I was recently asked to file some financial statements for an elderly gentleman, who, due to his age, no longer had the patience to undertake the task.  As I worked through the paperwork, it dawned on me that he was in fact due a refund of tax from HMRC.

The gentleman in question is 86 years old, thereby qualifying him for the higher tax free personal allowance of £10,660.  In addition, he has been married for over 56 years, entitling him to the married couples allowance of £7,705, taxable at 10%, plus, his taxable income (excluding savings) was lower than his personal allowance enabling him to use the savings tax rate band of £2,790, also taxable at 10%.  All these bands relate to the 2012/13 tax year.

I must say that this person in reality has a relatively simple financial state of affairs, but as already demonstrated above it involves three different tax bands!  So how did the refund occur?  The calculation below sets out the figures:-

	Amount (£)	Tax Paid (£)
State & Occupational Pensions	9,721.43	0.00
Interest from savings (Gross)	7,268.00	1,453.60
Total	16,989.43	1,453.60

As the pensions income was below the personal allowance no tax had been deducted, but tax had been deducted on the savings interest at the rate of 20%.  The actual tax required to be paid is as follows:-

	Pensions (£)	Savings (£)	Tax Due (£)
Tax free personal allowance (£10,660)	9,721.43	938.57	0.00
Savings tax rate band (£2,790 @ 10%)		2,790.00	279.00
Married couples allowance (£7,705 @ 10%)		3,539.43	353.94
Total	9,721.43	7,268.00	632.94

From the above two calculations it can be seen that a refund of 820.66 (£1,453.60 less £632.94) is due from HMRC.  This represents an increase in his net income of over 5%.  In addition because not all of the married couples allowance has been utilised, the unused portion can be transferred to his wife.  Her financial affairs were similar, although smaller, but between them they received a refund in excess of £1,400.

As I write this it feels that the whole process was easy, but I assure you it was not!  I had to detail all the income types, checking which income was classed as taxable or not (for instance the winter fuel allowance is not classed as taxable, and, does not need to be included in the taxable income figure).  A full listof taxable and non taxable income is available on the HMRC website.  Certain savings income which is paid tax free (for example index linked National Savings certificates) also does not need to be included.  Again a list of taxable andnon taxable savings interest can be found on the HMRC website.

When all the relevant data has been collated, to claim the refund you need to enter the information on the form R40, available on the HMRC website along with the guidance notes for completion.  Although you are not required to send the original documents to support the figures on the form, you are required to keep them for a period of two years after the submission of the R40 form.  If you have all the relevant original documentation, you can make backdated claims to HMRC going back to the 2009/10 tax year.  The deadline for submission of this claim is 5^th April, 2014.

It’s a shame that the process is so onerous, I imagine many individuals are put off from making a claim they are entitled to.  It appears that one of the problems probably boils down to the fact that financial institutions do not inform HMRC of the tax on interest paid by each individual.  If this could be achieved presumably by reference to a National Insurance number, HMRC would then be in a position to calculate refunds automatically.  On the other side of the coin, such information could also be used to ensure that higher rate taxpayers are declaring the correct rate of tax on their savings interest.

I hope you have found this article interesting and, hopefully beneficial, but please ensure you undertake your own research to ensure that if you submit a claim for a refund that you are following all the applicable rules. 

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