How does Overpaying effect Tax on Benefit in Kind

kam1977

Hi All

Wondering if anyone can help out with the above, since taking out my mortgage 18 months ago I have overpaid small amounts every month , but I can't work out if this just means I end up paying more tax? The P111D form is mind boggling, but it seems to boil down to some sort of calculation between money in , interest paid and the INTEREST HRMC reckon I should have paid, and I think that as I am overpaying as this means I pay less interest so HRMC will tax me more . Am I right?


Up to now I have only been paying very small amounts but should be able to afford more soon, but would I be better putting money into a saving account until I have a big enough lump then reduce the term and pay that in to the new mortgage ?

Thanks in advance for helping me make sense of this.

Kirsty

AnotherJoe

No you are wrong.

The only interest HMRC care about is that you earn on savings.

Unless Ive missed something about your circumstances , the p11d has nothing to do with the interest paid on your mortgage.

Does your employer pay your mortage or something like that you havent mentioned?

kam1977

Sorry thought I'd explained it . I have a staff mortgage so I pay base rate this is why I pay extra tax as HMRC treat as benefit in kind

Thrugelmir

By overpaying and reducing the balanced owed. Then the amount of interest that HMRC will assess your benefit liability on will be lower.
You'll not lose out by doing so.

TrickyDicky101

Because of the way the P11D calculation works, you may well be better off investing the overpayments in higher interest accounts up until end of March and then paying off the accumulated total against the staff mortgage before the end of the tax year (on 5th April).

This is because the interest that HMRC assesses you should have paid is based on average loan outstanding (over the tax year) and is calculated on the start and end of the tax year - so you can acquire maximum benefit (given your staff loan is so cheap) by borrowing on the staff loan and earning at a higher rate elsewhere and then overpaying before the P11D calculation point (5th April).

Of course, it may well make more economic sense to not overpay at all and just invest your cheap loan elsewhere over the year end and beyond. This isn't what I did though - I liked the feeling I got from overpaying.

AnotherJoe

OK then if as it seems you have a very low mortgage rate you will almost certainly be better off paying the extra money into a pension, for three reasons;
1. Tax benefits
2. Better growth than the interest rate you are paying
3. Inflation. Over time, inflation is reducing your loan so you shouldn't be in a rush to overpay.

Overpaying a mortgage might make you feel good, its often a poor financial option.