Money help desk My savings have been hit by double whammy

I RETIRED early from my job in further education at 57, and got my pension and an extra pension annuity. I also got a letter from the taxman asking about income and pension providers and interest from banks to get a new tax code.

I got a new coding letter for 2011/12 from them telling me I owed 360 in unpaid tax from interest. I had paid the tax at source, but then they called the rest income, and want to tax it again, which I am not happy with as I have paid tax at source. I feel I am being robbed!

MI

Susannah Simpson, a tax manager at PricewaterhouseCoopers, writes:

PAYE coding notices can include inaccurate or outdated information and you are quite correct always to check these carefully.

When you retire and begin to draw a pension, HM Revenue & Customs will issue an enquiry form to you in order to gather information on your total income, including any received from savings. The enquiry aims to ensure that the correct amount of PAYE is deducted from your new pension income throughout the tax year so that you pay the correct amount of tax.

HMRC then issues a coding notice based on the information you have provided. Savings income which has not had tax deducted at source by the payer (eg a bank) will appear in the coding notice. This allows the tax payable on this income to be collected through the PAYE system. Higher rate taxpayers are liable to pay tax in addition to the 20 per cent tax deducted at source on savings income, so a higher rate taxpayer would see an additional adjustment in tax codes to account for this.

Where a taxpayer has more than one source of pension income, the PAYE code on a second pension will indicate whether tax is deducted at 20 per cent for a basic rate taxpayer or at 40 per cent (or 50 per cent) for a higher rate taxpayer.

You are correct that interest which has already been taxed at source should not be included in the PAYE code applied to your pension income if you are a basic rate taxpayer. However, the adjustment shown in the code could be because you are a higher rate taxpayer or might be for another reason, eg HMRC might believe that you have underpaid tax for earlier tax years.

If you think the coding notice is incorrect, telephone your tax office to ask why the adjustment has been included. When calling, you should have available details of your interest income in the tax year to 5 April, 2010, and in the current tax year.