Paying tax on interest

Hi,

If you're on a PAYE job; how are you supposed to pay tax on interest? I'm guessing, with interest rates as they are, more people will be paying income tax on interest.

Looking at my main savings account it seems that I earned £586.21 in interest for the financial year of 2022/2023.

I'm a higher rate tax payer so my Personal Savings Allowance is £500. That means I will have £86.21 of taxable income to my name (presumably needing to be paid by the end of January 2024?).

I've tried to find information about how to pay this but it seems there is conflicting information online. The GOV.UK website says:

You pay tax on any interest over your allowance at your usual rate of Income Tax.

If you’re employed or get a pension, HMRC will change your tax code so you pay the tax automatically. To decide your tax code, HMRC will estimate how much interest you’ll get in the current year by looking at how much you got the previous year.

If you complete a Self Assessment tax return, report any interest earned on savings there.

Which suggests that, as someone on PAYE, I just need to sit back and do nothing and wait for them to charge me. Is this really the case? And if it's not the case and I do have to do a Self Assessment, is there not a shorter one that I can do? Many moons ago I was self-employed and I remember them being pretty arduous.

Thanks for any insight.

Comments

  • maxmycardagain
    maxmycardagain Posts: 5,739
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    not taxed at source?
    Now we all know how it felt to play in the band on the Titanic...
  • fonesaver
    fonesaver Posts: 250
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    shennan said:
    Hi,

    If you're on a PAYE job; how are you supposed to pay tax on interest? I'm guessing, with interest rates as they are, more people will be paying income tax on interest.

    Looking at my main savings account it seems that I earned £586.21 in interest for the financial year of 2022/2023.

    I'm a higher rate tax payer so my Personal Savings Allowance is £500. That means I will have £86.21 of taxable income to my name (presumably needing to be paid by the end of January 2024?).

    I've tried to find information about how to pay this but it seems there is conflicting information online. The GOV.UK website says:

    You pay tax on any interest over your allowance at your usual rate of Income Tax.

    If you’re employed or get a pension, HMRC will change your tax code so you pay the tax automatically. To decide your tax code, HMRC will estimate how much interest you’ll get in the current year by looking at how much you got the previous year.

    If you complete a Self Assessment tax return, report any interest earned on savings there.

    Which suggests that, as someone on PAYE, I just need to sit back and do nothing and wait for them to charge me. Is this really the case? And if it's not the case and I do have to do a Self Assessment, is there not a shorter one that I can do? Many moons ago I was self-employed and I remember them being pretty arduous.

    Thanks for any insight.

    If you earn over £10,000 in interest you need to complete a Self Assessment otherwise you can voluntarily complete one and your tax bill will be accurate and not estimated as with PAYE. It really isn't difficult you can complete online just keep a record of interest you receive from each account and total for the tax year.
  • Dazed_and_C0nfused
    Dazed_and_C0nfused Posts: 12,696
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    shennan said:
    Hi,

    If you're on a PAYE job; how are you supposed to pay tax on interest? I'm guessing, with interest rates as they are, more people will be paying income tax on interest.

    Looking at my main savings account it seems that I earned £586.21 in interest for the financial year of 2022/2023.

    I'm a higher rate tax payer so my Personal Savings Allowance is £500. That means I will have £86.21 of taxable income to my name (presumably needing to be paid by the end of January 2024?).

    I've tried to find information about how to pay this but it seems there is conflicting information online. The GOV.UK website says:

    You pay tax on any interest over your allowance at your usual rate of Income Tax.

    If you’re employed or get a pension, HMRC will change your tax code so you pay the tax automatically. To decide your tax code, HMRC will estimate how much interest you’ll get in the current year by looking at how much you got the previous year.

    If you complete a Self Assessment tax return, report any interest earned on savings there.

    Which suggests that, as someone on PAYE, I just need to sit back and do nothing and wait for them to charge me. Is this really the case? And if it's not the case and I do have to do a Self Assessment, is there not a shorter one that I can do? Many moons ago I was self-employed and I remember them being pretty arduous.

    Thanks for any insight.

    You have misunderstood things slightly.

    You have £586 taxable interest, not £86.

    The first £500 might be taxed at 0% but it's still taxable and forms part of your total (taxable) income.

    The remaining £86 would usually leave you owing £36-37 (including the amount most people on PAYE owe due to how PAYE works) and that could be too small for HMRC to collect?

    But you should expect an updated tax code for the current tax year at some point, on the basis you will receive £586 again this tax year.
  • jimjames
    jimjames Posts: 17,488
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    shennan said:
    Hi,

    If you're on a PAYE job; how are you supposed to pay tax on interest? I'm guessing, with interest rates as they are, more people will be paying income tax on interest.

    Ways round it - use ISAs to make interest tax free or pay into pension to get back below the high rate tax band. 
    Remember the saying: if it looks too good to be true it almost certainly is.
  • shennan
    shennan Posts: 27
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    You have misunderstood things slightly.

    You have £586 taxable interest, not £86.

    The first £500 might be taxed at 0% but it's still taxable and forms part of your total (taxable) income.

    The remaining £86 would usually leave you owing £36-37 (including the amount most people on PAYE owe due to how PAYE works) and that could be too small for HMRC to collect?

    But you should expect an updated tax code for the current tax year at some point, on the basis you will receive £586 again this tax year.
    Fair enough. This is largely semantics, I guess. We've arrived at the same figure that I owe: essentially £86 x 0.4?
  • shennan
    shennan Posts: 27
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    If you earn over £10,000 in interest you need to complete a Self Assessment otherwise you can voluntarily complete one and your tax bill will be accurate and not estimated as with PAYE. It really isn't difficult you can complete online just keep a record of interest you receive from each account and total for the tax year.
    Thanks for clarifying. So basically I can just wait and allow HMRC to change the tax code. Is there any benefit of not doing this? I have quite a lot going on right now with moving home so I could really do without filing a return. But obviously I want to stay legal.
  • Ayr_Rage
    Ayr_Rage Posts: 802
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    HMRC should change your code, however you will always be chasing your tail as income from interest varies from year to year.

    That is the only real downside to letting HMRC change your code.

    I file SA every year and pay the required balancing payment every 31st January which is fine if you are disciplined enough to send in your return early and then have the funds available to pay all at once.
  • aroominyork
    aroominyork Posts: 2,758
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    The banks/savings institutions will inform HMRC of the interest they pay you, and HMRC will change your tax code. You can sit back and do nothing.
  • shennan
    shennan Posts: 27
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    Thanks for your help everyone. I think this time around I will sit back and allow HMRC to do their thing.
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