Another PSA / tax article

pecunianonolet

Hi,

Looking for some answers. Understand in principle how it all works but as always the devil is in the detail.

Numbers below are hypothetical and for illustrative purpose only to gain understanding of the priciples

1. Reporting of interest/profits by financial institutions to HMRC

- On easy access accounts with interest paid either monthly or annualy, will the exact date of interest credited to the account be the basis for reporting?

- Monthly interest payment on bonds of 1y and under. E.g. you take a 6 month bond out on 25th Nov 22 with monthly interest and interest is paid into the same account and not away. Will reporting be split so that interest payments of Dec, Jan, Feb and March count against PSA of tax year 22/23 and payments in April and May account against 23/24 PSA? Is this the case even if funds overall are only accessible at the end of the bond? Any difference if paid away?

- Bonds of 1y and over with annual interest payment. Will interest be reported on the day credited and the respective tax year? So if I have a 2y bond paying annualy, will I get interest of year 1 and 2 into different tax years or will the interest of both years be accountable together when accessabile (similar question as above). I guess if the 2y bond has only one payment at end of term the full amount will be accountable in the tax year when paid.

2. Income calculation to determine PSA allowance of £500 or £1000

For 2022/23, most will have the full £1,000 PSA if they earn up to £50,270. So far so straight forward but now imagine 

- Job change within tax year
- 4 weeks "unemployed" between jobs but covering gap by savings
- Previous job annual income of 35k, net pay pension contributions
- New job 50k income, relief at source pension contributions
- Employer is paying a bonus of 1.5k in February and announces a salary increase of 2k backdated to Jan

To make it a little more interesting there is now an expected interest income in the range of £485 to £515 in the same tax year. There is no other income. Assume the tax code is S1257L or 1257L. Any changes if the tax code would be higher, let's say S1263L or 1263L?

(There might be differences between Scotland and other parts of the country due to different taxation laws, which might impact the answer so was throwing in another curvevball with the Scotland tax code.)

- We have additions like interest to the income, what deductions are there such as pension and are they applicable to this scenario?

--> How would somebody in general be able to work out their annual income and in what band they find themselvs in? Can't get my head round how HMRC is working this out.

3. PSA limited exceeded in tax year

Many of us have not had to bother much with PSA limits or even ISA's ever or in recent years and funds required to exceed limits in recent years had to be very high due to the low interest rates. However, this leads to my next set of questions.

- Assuming that in the current tax year 22/23 you exceed your PSA allowance, am I right that banks submit their data around October time to HMRC, they work their magic calculations for the many scanarios available, like the one above, and in early 2024 you get a lovely letter telling you what your new amended tax code is for tax year 24/25 so you technically start to pay from April 2024 onwards? Same respectivly for next tax year and 25/26

- Is HMRC sending out an overview with data of interest payments banks have submitted so sums and dates can be cross referenced with own recordings and/or statements or would that need to be specifically requested? If the latter, where?

- I read it before, I think here on MSE, that if you are only slightly over the PSA it is likely that HMRC is waving the case? Any experience and especially any evidence or references available?

- What happens, when you get your letter and HMRC is telling you that you have to pay tax beause of exceeding the PSA limit in a previous tax year, but in tax year 24/25, you have stopped working and have zero income? Will the tax liability be rolled over into the next tax year and so on until you eventually have income again and can pay or will it be dropped? 

- A per previous question, what happens if you have income but you stay within the tax free allowance?

- Even more, what happens when your residence status chnages and your now liable to tax payments in different country?

4. Other

Let's assume somebody is subject to a £500 PSA limit. We assume further somebody maxed out the RBS/Natwest digital saver limits with 5k each for the 6% interest gross (6.17% AER) and has no other savings. We further assume that the rates don't change for 12 months. This allone would bump you with 10k over the limit and would generate £600 interest gross and the £100 over are taxed. I guess the tax is universal for all at 40% (regional tax lawas e.g. in Scotland are ignored) for higher earners. 

Is there a specific approach or calculation to optimise tax and profits? I know, tax is not as evil as it sounds and overal profit counts. Maybe there is something as an optimal time during the tax year to fill an ISA or put cash into premium bonds vs. keeping it where it is and accept the tax in the future? Is there something to as an optimum?


Lots of detail and many questions. Thanks for reading that essay and looking forward to comments and the discussion   

InvesterJones

I'd try the tax board for better help. Interest wise, it's meant to be when the interest is available (i.e. on maturity for a bond), however it seems different organisations have different policies as to when they report available interest to HMRC - check with the individual organisation.

You do have a tax account at HMRC where you can see the calculations/assumptions.

In the case where you have a change of circumstances those assumptions are often wrong - if there is a likelihood of them being corrected by subsequent years PAYE they'll adjust tax code, but where not they'll send a P800 with a request or refund. I've had two in quick succession in opposite directions before so it's not perfect, but should eventually work out.

As for optimum, the usual hints apply: look after pension, use full ISA allowances - put the investments most likely to generate a return (either income or capital) in the tax wrapper and have them covered by the wrapper for the most amount of time they are generating a return (i.e. as soon as possible in most cases). Outside of tax wrappers don't fret too much - higher return after tax is sometimes better than highest return exempt from tax, and you're helping fund worthwhile things at the same time.

EthicsGradient

pecunianonolet,
" am I right that banks submit their data around October time to HMRC"
Can I ask where you got the October date from? I'm hoping to persuade a savings provider to tell me whether they've notified HMRC of interest from a multi-year product on an anniversary, but I'd hope they'd do it a bit earlier than that, since the deadline for a paper return is 31st Oct.

eskbanker

EthicsGradient said:

pecunianonolet,
" am I right that banks submit their data around October time to HMRC"
Can I ask where you got the October date from? I'm hoping to persuade a savings provider to tell me whether they've notified HMRC of interest from a multi-year product on an anniversary, but I'd hope they'd do it a bit earlier than that, since the deadline for a paper return is 31st Oct.

Institutions are required to submit returns by the end of June, but HMRC may not fully process them until much later.

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

The returns cycle

This example relates to the 2021 to 2022 tax period but the process follows the same annual cycle.

Date	Event
6 April 2021	UK tax year begins
Late February 2022	HMRC issues BBSI and OI notices requiring you to make a return
5 April 2022	UK tax year ends
30 June 2022	Deadline for submitting a return — unless otherwise stated in your notice

pecunianonolet

Thanks for the answers so far, still many open ones :-)

Dazed_and_C0nfused

pecunianonolet said:

Hi,

Looking for some answers. Understand in principle how it all works but as always the devil is in the detail.

Numbers below are hypothetical and for illustrative purpose only to gain understanding of the priciples

1. Reporting of interest/profits by financial institutions to HMRC

- On easy access accounts with interest paid either monthly or annualy, will the exact date of interest credited to the account be the basis for reporting?

- Monthly interest payment on bonds of 1y and under. E.g. you take a 6 month bond out on 25th Nov 22 with monthly interest and interest is paid into the same account and not away. Will reporting be split so that interest payments of Dec, Jan, Feb and March count against PSA of tax year 22/23 and payments in April and May account against 23/24 PSA? Is this the case even if funds overall are only accessible at the end of the bond? Any difference if paid away?

- Bonds of 1y and over with annual interest payment. Will interest be reported on the day credited and the respective tax year? So if I have a 2y bond paying annualy, will I get interest of year 1 and 2 into different tax years or will the interest of both years be accountable together when accessabile (similar question as above). I guess if the 2y bond has only one payment at end of term the full amount will be accountable in the tax year when paid.

2. Income calculation to determine PSA allowance of £500 or £1000

For 2022/23, most will have the full £1,000 PSA if they earn up to £50,270. So far so straight forward but now imagine 

- Job change within tax year
- 4 weeks "unemployed" between jobs but covering gap by savings
- Previous job annual income of 35k, net pay pension contributions
- New job 50k income, relief at source pension contributions
- Employer is paying a bonus of 1.5k in February and announces a salary increase of 2k backdated to Jan

To make it a little more interesting there is now an expected interest income in the range of £485 to £515 in the same tax year. There is no other income. Assume the tax code is S1257L or 1257L. Any changes if the tax code would be higher, let's say S1263L or 1263L?

(There might be differences between Scotland and other parts of the country due to different taxation laws, which might impact the answer so was throwing in another curvevball with the Scotland tax code.)

- We have additions like interest to the income, what deductions are there such as pension and are they applicable to this scenario?

--> How would somebody in general be able to work out their annual income and in what band they find themselvs in? Can't get my head round how HMRC is working this out.

3. PSA limited exceeded in tax year

Many of us have not had to bother much with PSA limits or even ISA's ever or in recent years and funds required to exceed limits in recent years had to be very high due to the low interest rates. However, this leads to my next set of questions.

- Assuming that in the current tax year 22/23 you exceed your PSA allowance, am I right that banks submit their data around October time to HMRC, they work their magic calculations for the many scanarios available, like the one above, and in early 2024 you get a lovely letter telling you what your new amended tax code is for tax year 24/25 so you technically start to pay from April 2024 onwards? Same respectivly for next tax year and 25/26

- Is HMRC sending out an overview with data of interest payments banks have submitted so sums and dates can be cross referenced with own recordings and/or statements or would that need to be specifically requested? If the latter, where?

- I read it before, I think here on MSE, that if you are only slightly over the PSA it is likely that HMRC is waving the case? Any experience and especially any evidence or references available?

- What happens, when you get your letter and HMRC is telling you that you have to pay tax beause of exceeding the PSA limit in a previous tax year, but in tax year 24/25, you have stopped working and have zero income? Will the tax liability be rolled over into the next tax year and so on until you eventually have income again and can pay or will it be dropped? 

- A per previous question, what happens if you have income but you stay within the tax free allowance?

- Even more, what happens when your residence status chnages and your now liable to tax payments in different country?

4. Other

Let's assume somebody is subject to a £500 PSA limit. We assume further somebody maxed out the RBS/Natwest digital saver limits with 5k each for the 6% interest gross (6.17% AER) and has no other savings. We further assume that the rates don't change for 12 months. This allone would bump you with 10k over the limit and would generate £600 interest gross and the £100 over are taxed. I guess the tax is universal for all at 40% (regional tax lawas e.g. in Scotland are ignored) for higher earners. 

Is there a specific approach or calculation to optimise tax and profits? I know, tax is not as evil as it sounds and overal profit counts. Maybe there is something as an optimal time during the tax year to fill an ISA or put cash into premium bonds vs. keeping it where it is and accept the tax in the future? Is there something to as an optimum?


Lots of detail and many questions. Thanks for reading that essay and looking forward to comments and the discussion   

Your tax code has absolutely nothing whatsoever to do with the amount of savings nil rate band (aka PSA) available.

The savings nil rate band entitlement is established by checking your liability ignoring that rate band.  So in a very simple scenario someone with taxable income of £50,300 and no RAS pension payments or Gift Aid contributions will be deemed a higher rate taxpayer and get a savings nil rate band of £500.  But then when the nilp rate band is actually applied won't pay any higher rate tax.

Banks and building societies are meant to report the interest by the end of June after the tax year ends, not October.

If you owe tax (or are due a refund) for a year then you wil get a P800 or PA302 calculation explaining the tax owed or refund due. 

A P800 is issued for a refund or where the tax can be collected via the tax code of a future tax year.  A PA302 is issued where you need to make direct payment to HMRC.  This should allow 3 months for payment and payment is due no earlier than 31 January after the end of the tax year the tax is owed for.

Tax owed for 2023:24 which can be collected via your tax code would normally be included in the code for 2025:26.

If, when the times comes to issue that code, you are no longer working or have very low income or the tax cannot be collected via your tax code (HMRC have specific rules about what can and can't be collected this way) then a PA302 Simple Assessment notice would be issued and you would have to pay the tax direct to HMRC.

These P800 and PA302 calculations do not include a breakdown of interest at individual bank account level.  If you want that level of detail you would need to request it from HMRC.

- I read it before, I think here on MSE, that if you are only slightly over the PSA it is likely that HMRC is waving the case? Any experience and especially any evidence or references available?

No idea where you read that but it absolute rubbish.  All that matters is the amount of tax owed (or overpaid), whether you are just over the available savings nil rate band is of no relevance whatsoever.

Remember millions of people don't even beenfit from the savings nil rate band as they have the Personal Allowance and savings starter rate band (where applicable) which must be used before the savings nil rate band can be used.

Scotland and Wales have no say over tax rates for interest the relevant rest of the UK rates apply (0, 0, 20, 40 & 45%).