When do I pay the tax on my savings

soon_to_be_retiree

Hi.
I am struggling to find the answer to this online so any help with the following scenario would be appreciated please.
During this tax year my savings will generate approx 5k interest, so I will be liable for the tax on £4k of this (£800 @ 20%). I have already used my current ISA limit and also have money in PBs.
During this tax year my PAYE earnings will be approx £25K so will my tax code be adjusted during this tax year and will I pay the additional £800 from my salary this tax year?
Or will my tax code for next year be adjusted?
The reason I ask is that from next year, I will be earning more for the next couple of years (approx £47K p.a.) and adjusting my tax code next year could push me into the higher tax rate bracket which I am trying to avoid.
If I will pay the tax on the interest in this year, I would hope to reduce my taxable interest next year and keep below the higher tax rate by 1. Using next year's 20k isa allowance and 2. Investing some of my savings in a NS&I 3 year bond, so the interest will be taxable on 3 years time when my income will have dropped again.
Sorry for such a complicated question but as you can see, the year that my tax codes get adjusted will be important to me.
If I have totally misunderstood the situation though, then please let me know!
Thanks

InvesterJones

Adjusting your tax code won't affect you being in the higher tax bracket or not.

eskbanker

It's effectively a three year cycle, in that tax on interest earned during 2024/25 will be calculated by HMRC during 2025/26 (late in calendar 2025) and your tax code adjusted in 2026/27 to collect it.

PAYE tax code adjustments don't actually affect your income tax liability in any given tax year though, so underpaid tax from a previous year may be collected via that mechanism but that doesn't change how much tax you'd be assessed to be liable for in the current year.

soon_to_be_retiree

Thanks 

So just to check I understand correctly please.

If I earn 25k salary and 4k interest this tax year, I am liable for the tax on 29k (minus 12570 personal allowance)

And if I earn 47k salary and 2k interest next year, I am liable for the tax on 49k (again minus the personal allowance).

This may not necessarily be paid in the years it is earned and it may take a couple of years to catch up but I shouldn't become a higher rate tax payer?
Thanks again 🙂

eskbanker

soon_to_be_retiree said:

Thanks 

So just to check I understand correctly please.

If I earn 25k salary and 4k interest this tax year, I am liable for the tax on 29k (minus 12570 personal allowance)

And if I earn 47k salary and 2k interest next year, I am liable for the tax on 49k (again minus the personal allowance).

This may not necessarily be paid in the years it is earned and it may take a couple of years to catch up but I shouldn't become a higher rate tax payer?
Thanks again 🙂

Yes, that's right, unless you live in Scotland....

ColdIron

soon_to_be_retiree said:

This may not necessarily be paid in the years it is earned and it may take a couple of years to catch up

They cannot change your tax code for salary or interest in the current tax year as they do not know what the figures are until the tax year is complete

jimjames

Other thing to bear in mind considering your username is that pension payments can be used to reduce your taxable income so if you're close to the threshold it can be very beneficial to pay into pension especially if salary sacrifice

soon_to_be_retiree

Thanks everyone and yes salary sacrifice AVCs are an option I am also considering, I just wasn't sure if I needed too, but everything is a lot clearer now

Dazed_and_C0nfused

Just to add to the previous comments you will be taxed on the full £5,000 but the first £1,000 is at 0%.  Shouldn't have any impact on you but it does with some people, for example where HICBC comes into play.

The tax owed for this year (2024-25) would normally be included in your 2026-27 tax code but once you get the calculation for 2024-25 (in roughly a years time) you can make a voluntary payment if you prefer.

You are also likely to find that in a years time your 2025-26 tax code is amended to include a deduction for interest as HMRC will assume you will get £5k again in the next tax year. 

This all comes out in the wash eventually and you would get a refund if necessary but if you want you can provide HMRC with a more accurate estimate if you know the interest in 2025-26 is going to be significantly less than it was in 2024-25.  AIUI they will want details for each individual account, not just a global figure of say £3k.

Paying a tax underpayment via your tax code doesn't change which tax rate you are liable to.

surreysaver

I wonder how many people, such as myself, are suddenly going to be paying a large amount of tax due to the sudden increase in interest rates last year, only to be owed a refund due to the fact this year we are keeping our taxable savings under control when HMRC are going to be making assumptions about next tax year's interest being similar to this year's 

InvesterJones

surreysaver said:

I wonder how many people, such as myself, are suddenly going to be paying a large amount of tax due to the sudden increase in interest rates last year, only to be owed a refund due to the fact this year we are keeping our taxable savings under control when HMRC are going to be making assumptions about next tax year's interest being similar to this year's 

I don't think they are sophisticated enough to try and predict what tax would be owed if your capital amount stayed the same and the interest rates go up. They'll just do it on actual interest earned, so if you kept it under a certain amount this year then they won't assume you'll go over it next.