Personal savings allowance

Zuzi

Thanks to this forum, I am slowly learning many things which affect my financial well-being, and I am very grateful for that. I have been quite ignorant, because I am relatively comfortable, but I understand that I should work on what can be improved, and today I have a few questions about the PSA.

My only source of income is my salary (and the interest I earn on my savings, I guess). My salary is >60K so that makes me a higher rate taxpayer, and I just realised the other day that this means I can only earn 500GBP tax-free from my savings, and everything else will be taxed at 40%. I have considerable savings so I will use up the PSA relatively soon.

My main question right now is - will the bank(s) I have these accounts with deduct the tax as and when appropriate themselves, or will I, at some point, have to separately pay it to HMRC? I know it doesn't change the end sums but emotionally, I would rather the tax was deducted right at source than having to send money to HMRC, or worse, get a "you owe tax" letter or similar.
My salary only increased into the higher tax bracket end of last year, so this is new for me. Also, my savings have grown and so have the interest rates (thank God) so I think this is the first year where I am at very real risk of using up my PSA soon and having to start to pay tax on my savings interest, so I have to think carefully about where and how to save.

[Deleted User]

Banks have not deducted tax at source for many years now. In any case, logically, how would any bank know your tax position?

400ixl

If you already have considerable savings, have you looked at increasing your pension contributions? Assuming you are not already maxing this out.

If your employer runs a salary sacrifice pension scheme you can sacrifice pre-tax salary (up to £40k per year) which means you do not pay tax on that amount (so save the 40%) and it can bring you back below the higher tax threshold for your savings as well.

Albermarle

As above . Having learnt from this forum you should also look at 
Savings & Investments — MoneySavingExpert Forum
Pensions, Annuities & Retirement Planning — MoneySavingExpert Forum

Especially regarding making use of the very generous higher rate tax relief on pension contributions .

Zuzi

Thanks for all the replies so far. Yes, pensions is another area I am learning about, I opted out during the first years of my career in UK (and worked abroad previously, which complicates it a little bit) but I started my contributions last year as my salary increased, and I am looking at increasing them further.

Zuzi

I am still confused about an aspect of this so adding on a follow-up question - how will I pay the tax on savings when it is due? (I know I will have to pay some because I will definitely go over the PSA)

I have googled around but still not clear - do I have to send in a self-assessment? Will it be deducted via my salary? Yes I understand, as mentioned in an earlier reply, that banks don't know my tax position or how much savings I have, but how then do HRMC know? 

I would rather this is deducted somewhere where I don't have to send any money "away" myself, but at the same time I want to be able to rely on paying exactly what needs to be paid, and nothing more. If this is deducted from my salary at any point, I imagine it will be difficult to see just how much tax I have paid on savings interest.

If anyone is able to explain in relatively simple terms, I would much appreciate.

Jeremy535897

Banks tell HMRC what your savings interest is (although the system is by no means foolproof). The only way to pay tax in the tax year is to work out in advance what you expect the interest for the tax year to be, deduct the appropriate PSA, and alter your tax code accordingly. That way the tax due on the savings is deducted at source. It's just that the source is your earnings rather than your savings. The following excerpt discusses the issue in more detail (but assumes you report the interest income in arrears, which means the tax will be adjusted in the following year's tax code):

"What happens if I have to pay tax on my savings interest?

Most people with bank and building society interest will not have to pay tax on their savings income due to the PSA. Banks and building societies do not deduct any tax at source from bank interest – it is paid gross.

The existence of the PSA and the fact that banks and building societies do not deduct tax at source means the tax position for most people who have modest amounts of savings income is straightforward and delivers the right result in the majority of cases. However, it also means that some people need to notify HMRC about their untaxed, taxable savings interest.

If you do have to pay tax on your bank and building society interest, and if you normally complete a tax return, then you can include the amount of savings income in the relevant section.

If you do not normally complete a tax return, you should tell HMRC about the taxable income by 5 October after the end of the tax year in which it arose (so 5 October 2023 for the tax year ending 5 April 2023). If they can, HMRC will take the extra tax you owe from your wages by changing your Pay As You Earn (PAYE) code. If they cannot adjust your tax code, they may send you a bill at the end of the tax year or ask you to fill in a tax return.

HMRC use information provided to them directly by banks and building societies about any savings interest income you receive. They may use this to send you a bill at the end of the tax year (the P800 form or Simple Assessment) and/or to amend your tax code. You should check the figure very carefully, as the amount can be incorrect. For example, the figures for joint accounts may not be reported correctly (especially if the account is not held in equal shares), estimated amounts from prior years may be rolled forward, or figures can even be duplicated. If you are unsure, you should contact HMRC to ask them for a breakdown.

Please note that you should not assume that HMRC will have a similar source of information on all types of income – for example you always need to advise HMRC yourself if you have taxable dividend income."

From https://www.litrg.org.uk/tax-guides/savers-property-owners-and-other-tax-issues/savings-and-tax#toc-what-happens-if-i-have-to-pay-tax-on-my-savings-interest-

Zuzi

Thanks a lot, that is a helpful link and extract.

I am starting to think that maybe getting a bill for the interest tax might be the best option after all, since I would be able to check the amount more easily, rather than when it's mixed with income tax.
I have put most of my savings in fixed / high interest paying accounts, which will hopefully offset the obligation to pay tax on the interest to a reasonable extent. In the medium term, I want to look at increasing my pension contributions and other tax relief options.