Paying tax on interest earning via tax code

I have recently taken out a 5 year bond at 5% and lucky to be earning around £2.5K per annum in interest per annum.  I pay tax on my interest earnings as I'm not on a low income.

As I understand it, if I earn interest on savings and the earnings are less than £10K, then HMRC will recover the tax using my tax code. Can I assume this is all automatic and I don't have to do anything myself?  I assume the change in the tax code will happen in the year after I earn the interest.  Is that correct?

Secondly, what happens when I stop earning interest on savings when the bond matures?  Do HMRC know to stop taxing me on non-existent interest earnings and automatically adjust my tax code again, or do I need to inform them?  Or do they just take the tax anyway and then refund any overpaid tax in the following tax year?  If the latter, is it down to me to ask them to review my tax if I think I've overpaid, or do they review it and just refund me automatically? 

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  • AlbermarleAlbermarle Forumite
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     Can I assume this is all automatic and I don't have to do anything myself?

    Correct, the savings provider will inform HMRC and they will act on it eventually. Only if you earn more than £10K in interest, then you need to fill in a self assessment return

    I assume the change in the tax code will happen in the year after I earn the interest.  Is that correct?

    Not sure, the wheels of HMRC are moving very slowly nowadays.

    or do I need to inform them? 

    This would be the best way, you can do it online via your personal tax account.

  • edited 17 December 2022 at 10:50AM
    Dazed_and_C0nfusedDazed_and_C0nfused Forumite
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    edited 17 December 2022 at 10:50AM
    I have recently taken out a 5 year bond at 5% and lucky to be earning around £2.5K per annum in interest per annum.  I pay tax on my interest earnings as I'm not on a low income.

    As I understand it, if I earn interest on savings and the earnings are less than £10K, then HMRC will recover the tax using my tax code. Can I assume this is all automatic and I don't have to do anything myself?  I assume the change in the tax code will happen in the year after I earn the interest.  Is that correct?

    Secondly, what happens when I stop earning interest on savings when the bond matures?  Do HMRC know to stop taxing me on non-existent interest earnings and automatically adjust my tax code again, or do I need to inform them?  Or do they just take the tax anyway and then refund any overpaid tax in the following tax year?  If the latter, is it down to me to ask them to review my tax if I think I've overpaid, or do they review it and just refund me automatically? 
    You're partly correct.  

    The typical way it works when you aren't completing Self Assessment returns and pay enough tax under PAYE for the tax owed to be included in your tax code is this (using 2023:24 tax year as the first year you will be liable to tax on the interest),

    2023:24 - you earn the interest

    June 2024 - the interest payer reports the interest paid in 2023:24 to HMRC.

    Summer/Autumn 2024 - HMRC send you a calculation showing the tax owed for 2023:24.  And a new tax code for 2024:25 which assumes (estimated) that you will earn the same amount of interest again.  This tax code is not collecting any tax owed from 2023:24

    Early 2025 - HMRC calculate your tax code for the 2025:26 tax year.  They will use the 2023:24 interest as an estimate again AND include the tax owed for 2023:24.

    6 April 2025 - 5 April 2026 - your employer/pension payer will use the tax code and the tax is paid off over 12 months

    June 2025 - the interest payer reports the interest paid in 2024:25 to HMRC

    Summer/Autumn 2025 - if necessary HMRC send you a calculation showing the tax owed for 2024:25. They tend to ignore small amounts so if your 2024:25 tax code was based on interest if say £2,500 and the actual interest was £2,550 you may not get a calculation  But a new tax code for 2025:26 would normally be issued using the latest interest figure (now the actual amount from 2024:25).  Normally this tax code is not collecting any tax owed from 2024:25

    And so on.....

    Sometimes you may get a Simple Assessment calculation (large amounts owed of £3,000 or more or you owe too much for it to be included in your tax code under HMRC rules) and this means you have to pay the tax direct to HMRC, usually by 31 January after the end of the tax year the tax is owed for.  Or 3 months after the calcualtion is issued if that was later than normal.

  • AlbermarleAlbermarle Forumite
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    Summer/Autumn 2024 - HMRC send you a calculation showing the tax owed for 2023:24.

    My calculation for 21/22 is still not done yet, so there can be delays to this.

  • Tom_BradburyTom_Bradbury Forumite
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    Summer/Autumn 2024 - HMRC send you a calculation showing the tax owed for 2023:24.

    My calculation for 21/22 is still not done yet, so there can be delays to this.

    Out of interest (no pun intended) - does HMRC have to inform you within there normal deadline of four years and/or are you responsible for informing them if you've not heard from them?
  • Dazed_and_C0nfusedDazed_and_C0nfused Forumite
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    Summer/Autumn 2024 - HMRC send you a calculation showing the tax owed for 2023:24.

    My calculation for 21/22 is still not done yet, so there can be delays to this.

    Out of interest (no pun intended) - does HMRC have to inform you within there normal deadline of four years and/or are you responsible for informing them if you've not heard from them?
    You normally need to inform them if there is additional tax due but banks and building societies are obliged to report the interest and there should be no need for you to anything if that is the only reason you owe any tax.

    https://www.gov.uk/guidance/bank-and-building-society-interest-returns

    Occasionally things will get delayed but you should normally hear from HMRC within a year or two of the end of each tax year if there is anything to pay (or a refund is due).

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