Income tax on savings interest going above personal savings allowance for one year only

InvesterJones

As I understand it, per government 'apply-tax-free-interest-on-savings' page, if you go over your Personal Savings Allowance and are employed, HMRC will change your tax code to pay income tax automatically (since savings have NI details and report interest directly).

My question is what happens going forwards?

Example scenario:

Year 1: £100 interest over Personal Savings Allowance is earned
Year 2: interest is below PSA

Year 3: interest is below PSA

In year 2 the tax code is changed to recover the tax due on year 1's interest above PSA, but is it set to just recover the amount from year 1, or is it set to assume you earn the same interest in year 2 as well?

In the latter case, will the tax code in year 3 subsequently account for that so the tax paid is correct, or do you need to reclaim the additional tax paid manually (via form R40)? And going forwards, reclaim each year until they fix the tax code to stop paying additional tax that is not due?

Dazed_and_C0nfused

In year 2 the tax code is changed to recover the tax due on year 1's interest above PSA, but is it set to just recover the amount from year 1, or is it set to assume you earn the same interest in year 2 as well?

That isn't quite right.  The tax due for year 1 will normally be collected by a tax underpaid tax code adjustment in year 3.  The adjustment in year 2 is to collect any tax due for year 2.

This is all automated by HMRC, no need to submit an R40.  If the interest was all taxable at 0% in year 2 any tax overpaid would be refunded by HMRC after the end of the tax year.

InvesterJones

Ah OK yes that makes sense. Great to hear HMRC will refund without action needed, that wasn't clear from the govt page.

Dazed_and_C0nfused

https://www.gov.uk/tax-overpayments-and-underpayments