We'd like to remind Forumites to please avoid political debate on the Forum. This is to keep it a safe and useful space for MoneySaving discussions. Threads that are - or become - political in nature may be removed in line with the Forum’s rules. Thank you for your understanding.

Savings interest - Taxed in which year?

I’m approaching 60 and will soon start receiving a DB pension, which will provide an income of about £8K during tax year 2023/24. Income from savings interest during this tax year will be about £7K. No salary or other income, so a total income of about £15K. With personal allowance of 12570, starter rate for savings of 5000 and personal savings allowance of 1000, it would appear at first glance that no tax should be due. 

Next year (2024/25) the pension income will be approx £13K, and with a big chunk of savings disposed of, the savings interest will reduce to approx £4K. So a total income of about £17K. Again, it seems to appear no tax should be due.

However, I’m under the impression savings interest is rolled into the following year, and if so, this would cause a tax payment in 2024/25. I’ve become confused about how/when savings interest is taxed and would like to understand how the above scenario is treated by HMRC. Could anyone offer clarity?

Comments

  • I’m approaching 60 and will soon start receiving a DB pension, which will provide an income of about £8K during tax year 2023/24. Income from savings interest during this tax year will be about £7K. No salary or other income, so a total income of about £15K. With personal allowance of 12570, starter rate for savings of 5000 and personal savings allowance of 1000, it would appear at first glance that no tax should be due. 

    Next year (2024/25) the pension income will be approx £13K, and with a big chunk of savings disposed of, the savings interest will reduce to approx £4K. So a total income of about £17K. Again, it seems to appear no tax should be due.

    However, I’m under the impression savings interest is rolled into the following year, and if so, this would cause a tax payment in 2024/25. I’ve become confused about how/when savings interest is taxed and would like to understand how the above scenario is treated by HMRC. Could anyone offer clarity?

    It's taxable against the tax year the bank or building society report it to HMRC against.

    In most cases that will simply be the tax year the interest is added to your account.
  • eskbanker
    eskbanker Posts: 33,487 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    I’m under the impression savings interest is rolled into the following year, and if so, this would cause a tax payment in 2024/25. I’ve become confused about how/when savings interest is taxed and would like to understand how the above scenario is treated by HMRC. Could anyone offer clarity?
    I'm not sure what you mean by interest being 'rolled into the following year'?  Savings interest income is liable to be taxed in the year it's received, or are you perhaps referring to the fact that HMRC will assume that you'll earn the same in savings interest from one year to the next when setting PAYE tax codings?

    If so then yes, this is true, but it all comes out in the wash at the end of the year so it's not actually an additional tax liability as such, so if you've overpaid tax then you can claim a refund, or alternatively, you can advise HMRC in advance of your projected lower savings income.
  • FrugalFredi
    FrugalFredi Posts: 25 Forumite
    10 Posts First Anniversary Name Dropper
    edited 1 July 2023 at 12:58PM

    Manythanks Dazed_and_C0nfused and eskbanker, that seems straight forward and reassuring. I was confusing tax on interest with coding adjustment in the following year. It all seems clear now. Thank you.
  • Dazed_and_C0nfused
    Dazed_and_C0nfused Posts: 15,108 Forumite
    10,000 Posts Fourth Anniversary Name Dropper
    edited 1 July 2023 at 1:24PM
    The main thing you need to ensure is that HMRC's estimate of your pension is in line with what you know it will be.

    If you have spare Personal Allowances then interest uses those before the 0% tax bands can be used.

    So if HMRC estimate your pension for 2024-25 to be say £11,500 then they will include a deduction in your tax code of £1,070, relating to the interest you receive.

    That would give you tax code 1150L and mean no tax is deducted if your pension was actually £11,509 (or less).  But if you know your pension will be say £13,000 then you would pay more tax than necessary on code 1150L.

    But if you update the estimate of your pension income to £13,000 using your Personal Tax Account there won't be any spare Personal Allowance to use and your tax code will be changed to 1257L and you should pay the correct tax during the year, avoiding the need to wait for a refund after the tax year ends.

    The above assumes that any interest you do have in 2024-25 will all be liable to tax at 0% and none at 20%.
  • FrugalFredi
    FrugalFredi Posts: 25 Forumite
    10 Posts First Anniversary Name Dropper
    That's great, I think I understand. Simply keep the estimated pension income updated so that the pension is correctly taxed each year.  Following that, tax on the interest will be calculated, in the year it is received, based on any remaining personal allowance and/or starter rate for savings plus the £1000 PSA. Everything should therefore work out correctly within each year. 

    Thanks for the all the help and that clear explanation, my mind is at rest.
Meet your Ambassadors

Categories

  • All Categories
  • 346.6K Banking & Borrowing
  • 251.4K Reduce Debt & Boost Income
  • 451.4K Spending & Discounts
  • 238.8K Work, Benefits & Business
  • 614.3K Mortgages, Homes & Bills
  • 174.8K Life & Family
  • 252K Travel & Transport
  • 1.5M Hobbies & Leisure
  • 16K Discuss & Feedback
  • 15.1K Coronavirus Support Boards

Is this how you want to be seen?

We see you are using a default avatar. It takes only a few seconds to pick a picture.