I am writing to you as I saw your column about someone being taxed because HMRC had deducted savings interest from their personal tax allowance.

I was taxed £11.72 on dividend income because HMRC had deducted my savings interest from my personal tax allowance.

If they hadn't deducted it, I would not have had to pay any tax. HMRC is adamant that its calculation is correct, even though my friend, who is an accountant, ran my figures through her firm's software and agreed with me that no tax was due.

In my case, I transferred the maximum possible amount of my personal allowance to my husband, thus reducing my allowance to £11,310.

My savings interest for the year was £624, which is less than the personal savings allowance of £1,000, so no tax is due on my interest.

Even though I have written to and phoned HMRC it is still maintaining that the calculation is correct.

Please can you assist me in this matter as it appears it is prevalent and needs addressing to prevent people being overcharged tax.

Steve Webb replies: Your story illustrates the fiendish complexity of the way savings are taxed.

In your case, HMRC not only got your tax calculation wrong in the first place, but when you challenged them you received a detailed three-page letter justifying the wrong figure.

It turns out that your case was one of over 100,000 which had to be manually double-checked last year to make sure that these complex rules had been applied correctly.

But when your tax position was checked manually, HMRC got it wrong.

The complexity arises from the fact that there are a series of different allowances which can be offset against taxable interest income and dividend income as well as the standard personal allowance.

And the order in which these allowances are applied also needs to be correct, otherwise the tax calculation will be wrong.

Let's start with the personal savings allowance.

As a basic rate taxpayer you can have up to £1,000 per year of interest income ignored when your tax bill is worked out.

In your case, you had £624 of savings interest so this should never have figured in your tax calculation.

Separate to this there is a dividend allowance of £500 per year. You had dividend income of around £1,500, so the first £500 of this is ignored and the balance of around £1,000 goes into your income tax calculation.

You have told me that you and your husband used the marriage allowance system.

This allows you (as a non-taxpayer) to transfer 10 per cent of your personal allowance to your husband, who is a basic rate taxpayer.

This reduced your personal allowance from the standard £12,570 to £11,310.

But your pension income of £9,796 plus the £1,000 or so of dividend income above the allowance is still below your personal allowance. As a result your tax bill should have been zero.

Unfortunately, when HMRC worked out your tax bill it didn't do it like this.

From the letter that it originally sent, it seems as though it included your interest income in full as part of your taxable income.

This meant less personal allowance left over to set against your dividend income and, as a result, you went over the threshold.

When I contacted HMRC on your behalf it quickly wrote back to you admitting the error, refunding the small overpayment of tax, and offering £50 for 'distress and inconvenience'.

In HMRC's reply it said: 'During our review of your complaint, we found that your tax calculation had not correctly applied the beneficial ordering of your allowances and reliefs in relation to your bank and building society interest.

'As a result, the calculation did not give you the full benefit of the available savings income treatment.'

In plain English, what this means is that it should have applied the personal savings allowance to your interest income first.

This would have wiped it out and it would then not have featured in your tax calculation.

However, whilst I'm pleased HMRC got your calculation right third time around, what puzzled me is how it got it wrong in the first place.

I can entirely see how an HMRC clerk replying to your query and armed with a pocket calculator might make a mistake.

But the person who originally wrote to you was trying to justify a figure which – presumably – the HMRC 'computer' had generated.

And if the computer got your figure wrong, how many more people have been wrongly taxed, and for how long?

I put this to HMRC and it turns out that the initial calculation by 'the computer' doesn't always get things right.

In 2025-26 it had to double-check over 100,000 cases where a scan suggested that people 'may not' have had the allowances applied in the most favourable order.

Apparently, HMRC expects around 20,000 cases to need this process in 2026-27.

An HMRC spokesman said: 'We've written to your reader to apologise, confirm that we've issued the refund she's owed and that we've sent her a redress payment.

'Such cases are rare and changes are being made which will reduce the number of cases requiring manual processing.'

But whilst they say that errors are 'rare', any large scale manual process like this must introduce the risk of error.

I would therefore strongly encourage people to look at their income tax calculation for last year (and previous years) to see if it all makes sense.

In particular, those with modest incomes and with some untaxed savings interest should make sure that any small tax bill they ended up with was correct.