PAYING TAX ON INTEREST FROM SAVINGS

Moots2024

I have just retired.

My scenario is simple in that I have only one source of pension - from the local government pension scheme. My pension alone uses up all my personal allowance. The annual interest from my savings is likely to well exceed the Personal Savings Allowance though will be nowhere near the £10,000 that is often mentioned by HMRC as being the trigger for the need to complete a self assessment tax return.

I am aware that interest from a bank or building society account is paid gross of tax and have read that the banks/building societies advise HMRC of savings and it then will collect tax due through my PAYE code.

My query is does this mean, to the layman like me, that in practice when I receive my pension payslip the tax deduction will include not just tax on the pension itself but tax on the interest my savings earn? I think I have read something suggesting HMRC assesses the interest the taxpayer is likely to make in calculating the tax due.

ColdIron

Depending upon how much your pension exceeds the Personal Allowance you may be able to make use of the Starting Rate for Savings, before the Personal Savings Allowance, so may pay no tax on your interest at all

https://www.moneysavingexpert.com/savings/tax-free-savings

https://www.gov.uk/apply-tax-free-interest-on-savings

Moots2024

Thanks. Appreciated.

However, my query is raised on the assumption that I will have to pay tax. Take that as read. I am not seeking advice on the starting rate for saving. What I am interested in is how this works in practice. Does HMRC advise the pension fund of the amount due and will it then automatically form part of the deduction on my pension payslip?

eskbanker

Yes, once HMRC have received the information from the institutions paying you the interest, they'll adjust your tax code, so that the tax deducted via PAYE is calculated according to your overall liability rather than simply that from the pension, unless it exceeds the amount recoverable via PAYE, in which case they'll expect payment sooner.

ColdIron

Moots2024 said:

Does HMRC advise the pension fund of the amount due and will it then automatically form part of the deduction on my pension payslip?

Yes. The banks/building societies advise HMRC of savings interest and they will issue a new tax code to your pension provider who will use it to recoup the tax owed

Moots2024

Great. Thanks very much Coldiron. Grateful for that.

Moots2024

Thanks to eskbanker as well

Dazed_and_C0nfused

Moots2024 said:

Thanks. Appreciated.

However, my query is raised on the assumption that I will have to pay tax. Take that as read. I am not seeking advice on the starting rate for saving. What I am interested in is how this works in practice. Does HMRC advise the pension fund of the amount due and will it then automatically form part of the deduction on my pension payslip?

It usually works on a three (tax) year cycle.

Year 1 - you earn the interest

Year 2 - banks report the interest earned in year 1 to HMRC.  HMRC then calculate any tax due for year 1 and notify you via a P800 tax calculation.  HMRC will also review your tax code for year 2 and make any adjustments needed to start collecting extra tax for year 2.  They assume you will receive the same interest as you did in year 1.  This adjustment is not to collect the tax for year 1.

Year 3 - the tax owed for year 1 is included in your tax code and collected equally across the year.

If HMRC don't think you will be able to pay the tax via your code, for example you don't normally pay tax under PAYE, then they will send you a Simple Assessment (PA302) and you would be expected to pay the tax by 31 January after the end of the tax year the tax is owed for.

westv

May I jump in on this thread.
I know basic rate tax payers get £1,000 of interest tax free and anything above that is taxed at 20%
For higher rate tax payers the rate is 40% on anything over £500.
Until this morning I was happy in the knowledge that sal sac was bringing my total income for 2023/24 to within the 20% tax rate.
However, I received a letter this morning from the FAS (PPF) to advise me of a backdated increase in my pension payments. Good news obviously but I have just realised it might tip me into 40%.
Question is, if I go even £1 into the 40% rate would my savings tax free interest amount cut to £500 or is it graded in some way? From memory my total taxable interest for the year will be around £1,300.

ColdIron

It's not graded

https://www.gov.uk/apply-tax-free-interest-on-savings

It depends on your tax band

https://www.gov.uk/government/publications/rates-and-allowances-income-tax/income-tax-rates-and-allowances-current-and-past#tax-rates-and-bands

You might still have a month or two to increase your SS or just make a contribution to it or a SIPP

westv

Many thanks for that.