Tax on interest

safe_hands2

I think the bit that's putting me off is checking the interest I've received against the new tax code HMRC give me and understanding if that's right. I'm worried I'll end up paying too much extra tax and either not realise or not know how to correct it.

eskbanker

safe_hands2 said:

If the interest was coming from just one account it would be easy, but nature of saving now is that I've pots in many places. That's the toss up - forgo some return for less hassle 😀

It's not inherently the nature of saving now to spread your assets, but if you choose to do so, I presume this is to optimise your returns (entailing the hassle of opening and running multiple accounts, plus monitoring the market), and so the obvious thing to do is to continue along that path, rather than artificially treating the personal savings allowance as a target maximum figure!

westv

PeskyBlunder said:

It will be done automatically.

It was something I was wondering too.

Aristotle67

I am in a similar boat as the OP in that I have work pension and savings, the latter being in a number of places. 

I am with bigwheels1111 in that I don't find tracking interest much of a hassle at all; in fact it is quite fun as I am always on the lookout for better returns and will switch accounts when favourable opportunites arise, so am constantly updating my tracking records. 18 months ago this was all quite new to me but I do not find it complicated or time consuming. I am always going to take the best I can find and see no reason to forgo extra interest when recording this it takes just a few minutes of my time. 

On a not dissimilar note, I am going to be introduced to Self Assessment for 2023-24 because I will exceed £10,000 in interest during this tax year. It would be possible to avoid this by buying the maximum allocation of premium bonds and putting some funds in lower interest accounts, but again I see no reason to do so. I gather it is not too complicated or time consuming, is nothing to be afraid of, and so I am not going to reduce the income from savings simply to avoid this. Holly Mead, in one of her Saturday columns in The Times a few months ago, suggested that some might prefer to invest in premium bonds rather than risk issues arising with HMRC getting their tax code wrong. I dare say that may be the case for some but even if that eventuality did occur I am sure it is nothing that couldn't be sorted out. There speaks someone who has never had any issues with tax and HMRC!

safe_hands2

So have been thinking a bit more about it after your posts. As a simple example, is this how it works?

If my interest from this April to next April is £1200, would my tax code for next year change to 1237L? Then if next year I earn less than £1000 in interest, would it automatically revert back to 1257L? When does the tax code change?

If all of that is completely wrong, that's why it worries me, because I don't really understand how it works.

safe_hands2

Just realised that's wrong! It would be £40 tax not £200 to pay, so would the tax code be 1253L?

Bigwheels1111

Aristotle67 said:

I am in a similar boat as the OP in that I have work pension and savings, the latter being in a number of places. 

I am with bigwheels1111 in that I don't find tracking interest much of a hassle at all; in fact it is quite fun as I am always on the lookout for better returns and will switch accounts when favourable opportunites arise, so am constantly updating my tracking records. 18 months ago this was all quite new to me but I do not find it complicated or time consuming. I am always going to take the best I can find and see no reason to forgo extra interest when recording this it takes just a few minutes of my time. 

On a not dissimilar note, I am going to be introduced to Self Assessment for 2023-24 because I will exceed £10,000 in interest during this tax year. It would be possible to avoid this by buying the maximum allocation of premium bonds and putting some funds in lower interest accounts, but again I see no reason to do so. I gather it is not too complicated or time consuming, is nothing to be afraid of, and so I am not going to reduce the income from savings simply to avoid this. Holly Mead, in one of her Saturday columns in The Times a few months ago, suggested that some might prefer to invest in premium bonds rather than risk issues arising with HMRC getting their tax code wrong. I dare say that may be the case for some but even if that eventuality did occur I am sure it is nothing that couldn't be sorted out. There speaks someone who has never had any issues with tax and HMRC!

I’ve got the same issue for the next 5 years starting 2024, self assessment form will be easy for me.
Basically 2 boxes to fill out.
Earning and interest.

eskbanker

safe_hands2 said:

So have been thinking a bit more about it after your posts. As a simple example, is this how it works?

If my interest from this April to next April is £1200, would my tax code for next year change to 1237L?

If you had a tax liability arising from interest earned in 2023/24 then HMRC would find out about this next summer and would subsequently adjust your tax code for the following year, i.e. 2025/26, not 2024/25.

safe_hands2 said:

Just realised that's wrong! It would be £40 tax not £200 to pay, so would the tax code be 1253L?

I believe you were right the first time, i.e. the code would have to be changed by £200 in order to collect the additional £40 in tax.

However, I wouldn't get too hung up on tax codes, the important thing is to be able to validate that you ultimately pay the correct amount of tax, which can be done via your personal tax account online, rather than specifically looking at how PAYE handles it.

Dazed_and_C0nfused

safe_hands2 said:

So have been thinking a bit more about it after your posts. As a simple example, is this how it works?

If my interest from this April to next April is £1200, would my tax code for next year change to 1237L? Then if next year I earn less than £1000 in interest, would it automatically revert back to 1257L? When does the tax code change?

If all of that is completely wrong, that's why it worries me, because I don't really understand how it works.

You're on the right lines but the timings are a bit out.

If the interest for 2023-24 was £1,200, on which £40 tax was owed and HMRC decided to collect it then you would normally pay the tax owed for 2023-24 via an adjustment to your 2025-26 tax code.  You would normally be notified during 2024-25 but the tax wouldn't be collected until the following tax year.

But HMRC will also assume that you will receive £1,200 again in 2024-25 and will adjust your 2024-25 tax code to start collecting the extra tax due for 2024-25.

If it turns out your 2024-25 interest is only say £900 and it is taxed at 0% then any tax overpaid for 2024-25 will either be refunded to you direct or would reduce the £40 you owed from 2023-24 meaning your 2025-26 tax code would be adjusted so you would get a refund through your wages/pension.

badger09

Dazed_and_C0nfused said:

safe_hands2 said:

So have been thinking a bit more about it after your posts. As a simple example, is this how it works?

If my interest from this April to next April is £1200, would my tax code for next year change to 1237L? Then if next year I earn less than £1000 in interest, would it automatically revert back to 1257L? When does the tax code change?

If all of that is completely wrong, that's why it worries me, because I don't really understand how it works.

You're on the right lines but the timings are a bit out.

If the interest for 2023-24 was £1,200, on which £40 tax was owed and HMRC decided to collect it then you would normally pay the tax owed for 2023-24 via an adjustment to your 2025-26 tax code.  You would normally be notified during 2024-25 but the tax wouldn't be collected until the following tax year.

But HMRC will also assume that you will receive £1,200 again in 2024-25 and will adjust your 2024-25 tax code to start collecting the extra tax due for 2024-25.

If it turns out your 2024-25 interest is only say £900 and it is taxed at 0% then any tax overpaid for 2024-25 will either be refunded to you direct or would reduce the £40 you owed from 2023-24 meaning your 2025-26 tax code would be adjusted so you would get a refund through your wages/pension.

Keeping track of interest is relatively easy if you maintain decent records.
This is the tricky bit, because HMRC will include estimates of interest, even on Regular Savings accounts which have matured & closed. 

But even if HMRC eventually calculate your liability correctly, persuading them to correct the coding adjustments based on those incorrect estimates is a task not to be undertaken lightly. 

I would welcome the chance to self assess, rather than have to go through this tortuous process.