Tax on savings interest

James01

HI,  If you are allowed £1000 interest tax free a year, why does hmrc deduct your savings interest from your tax free allowance?  Eg,  £200 savings interest means my tax allowance is £12370 instead of £12570.  I know I'm probably missing something but I can't figure it out.  Thanks.

eskbanker

James01 said:

HI,  If you are allowed £1000 interest tax free a year, why does hmrc deduct your savings interest from your tax free allowance?  Eg,  £200 savings interest means my tax allowance is £12370 instead of £12570.  I know I'm probably missing something but I can't figure it out.  Thanks.

You're probably thinking of tax codes rather than allowances as such - they may adjust codes for low earners who aren't projected to use up their full personal allowance, but such codes are only used to drive PAYE deductions and shouldn't result in any more tax actually being payable.  The way HMRC have implemented this is undoubtedly cumbersome and confusing though, similar queries come up fairly regularly on here....

James01

eskbanker said:

James01 said:

HI,  If you are allowed £1000 interest tax free a year, why does hmrc deduct your savings interest from your tax free allowance?  Eg,  £200 savings interest means my tax allowance is £12370 instead of £12570.  I know I'm probably missing something but I can't figure it out.  Thanks.

You're probably thinking of tax codes rather than allowances as such - they may adjust codes for low earners who aren't projected to use up their full personal allowance, but such codes are only used to drive PAYE deductions and shouldn't result in any more tax actually being payable.  The way HMRC have implemented this is undoubtedly cumbersome and confusing though, similar queries come up fairly regularly on here....

Thanks, I understand it now.  I have previously been well under the tax threshold, so the tax code reduction didn't make any difference, however this year I am close to it so it will make a difference.  I think I need to contact them and let them know my income will increase this year. 

Albermarle

If you are registered with an  on line personal tax account with HMRC ( they encourage this ) you can change your estimated income for the year there. Easier than calling them.

RG2015

Albermarle said:

If you are registered with an  on line personal tax account with HMRC ( they encourage this ) you can change your estimated income for the year there. Easier than calling them.

This is correct, although it only applies to salary or pension income not savings income. That said, you can view the amount of interest included in the income tax estimate for the current year.

James01

Albermarle said:

If you are registered with an  on line personal tax account with HMRC ( they encourage this ) you can change your estimated income for the year there. Easier than calling them.

Thanks that's good to know. I am registered with an online but didn't realise I could change my income details.  That will be much easier than trying to get through on the phone.

Dazed_and_C0nfused

James01 said:

Albermarle said:

If you are registered with an  on line personal tax account with HMRC ( they encourage this ) you can change your estimated income for the year there. Easier than calling them.

Thanks that's good to know. I am registered with an online but didn't realise I could change my income details.  That will be much easier than trying to get through on the phone.

If your estimated pension/earnings income is £12,570 or more then there will no longer be any deduction in your tax code as your Personal Allowance will be fully utilised by your pension/earnings and not available to use against the interest.

Although highly unlikely to make any material difference you should be aware that you can only use the £1,000 Personal Savings Allowance (actually a 0% tax rate) if your total taxable income exceeds £17,570.  If it is less than that then your interest would be taxed under the savings starter rate, another 0% tax band which applies if your pension/earnings don't use all of the first £5,000 of your basic rate band.

colsten

RG2015 said:

Albermarle said:

If you are registered with an  on line personal tax account with HMRC ( they encourage this ) you can change your estimated income for the year there. Easier than calling them.

This is correct, although it only applies to salary or pension income not savings income. That said, you can view the amount of interest included in the income tax estimate for the current year.

I have been updating my expected savings interest income online in my tax account for at least the past 3 years. You just pick a ‘non earned income’ category for it

RG2015

colsten said:

RG2015 said:

Albermarle said:

If you are registered with an  on line personal tax account with HMRC ( they encourage this ) you can change your estimated income for the year there. Easier than calling them.

This is correct, although it only applies to salary or pension income not savings income. That said, you can view the amount of interest included in the income tax estimate for the current year.

I have been updating my expected savings interest income online in my tax account for at least the past 3 years. You just pick a ‘non earned income’ category for it

This is good to know, but I (and others posting on this site) can only update or remove existing pension or salary income.

t0rt0ise

I had to phone them to tell them that they had overestimated my savings interest and so were overtaxing me. Gave them a new estimate and they accepted it without question. Couldn't do it online so had to call but it didn't take too long.