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How does tax on savings work in reality?
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Canny_mal
Posts: 273 Forumite


This might sound dumb but i'm struggling to get my head around how HMRC collects tax on interest paid on savings.
I understand that basic rate tax payers can earn £1000 interest in a tax year without needing to pay any tax but what happens if you earn over £1000 of interest?
I am wondering this, partly because i have approximately 20 different savings accounts with varying balances. I'm assuming each financial institution has a legal obligation to tell HMRC how much interest it paid to each of it's customers in the previous tax year.
Then i'm guessing HMRC add all these amounts together and that gives them the total amount of interest each person has earned in a given tax year.
But then what? If a person has earned £1500 in interest how do HMRC go about taxing the £500 which was over and above the £1,000 personal allowance?
I think i read somewhere that they adjust your tax code. Is that correct? It just seems like an terribly long winded process. So everyone who earned over £1000 in interest between Apr 23 - April 24 is now on a non-standard tax code?
And i guess it doesn't matter how little over the £1000 you were. So as a daft example, someone who earned £1005 interest still has their tax code tweaked so HMRC can collect the tax on the £5?
Also, is there a way to see how much interest HMRC think you've earned in a tax year or have you just got to assume the figures they have are correct, without actually being able to see them for yourself?
I'm sure there are people on here with a clear understanding of the process. Can anyone enlighten me?
I understand that basic rate tax payers can earn £1000 interest in a tax year without needing to pay any tax but what happens if you earn over £1000 of interest?
I am wondering this, partly because i have approximately 20 different savings accounts with varying balances. I'm assuming each financial institution has a legal obligation to tell HMRC how much interest it paid to each of it's customers in the previous tax year.
Then i'm guessing HMRC add all these amounts together and that gives them the total amount of interest each person has earned in a given tax year.
But then what? If a person has earned £1500 in interest how do HMRC go about taxing the £500 which was over and above the £1,000 personal allowance?
I think i read somewhere that they adjust your tax code. Is that correct? It just seems like an terribly long winded process. So everyone who earned over £1000 in interest between Apr 23 - April 24 is now on a non-standard tax code?
And i guess it doesn't matter how little over the £1000 you were. So as a daft example, someone who earned £1005 interest still has their tax code tweaked so HMRC can collect the tax on the £5?
Also, is there a way to see how much interest HMRC think you've earned in a tax year or have you just got to assume the figures they have are correct, without actually being able to see them for yourself?
I'm sure there are people on here with a clear understanding of the process. Can anyone enlighten me?
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Comments
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First things first, HMRC do not always get the total right.Its down to bank etc to report the amount.Some do not, Raisin for one.I keep exact records myself just in case.Beyond that I have to file self assessment as get over 10k interest.They will just amend you code for next year.Just check it in April, to make sure they have adjusted it for the right amount.0
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Bigwheels1111 said:First things first, HMRC do not always get the total right.Its down to bank etc to report the amount.Some do not, Raisin for one.I keep exact records myself just in case.Beyond that I have to file self assessment as get over 10k interest.They will just amend you code for next year.Just check it in April, to make sure they have adjusted it for the right amount.
I have a savings account which i opened through Raisin that has a considerable balance. Are you saying HMRC will have no idea how much interest i've earned from that account?
And how do i check if HMRC have adjusted my tax code by the right amount? Is it as simple as if i went £500 over the personal savings interest allowance my tax code should be £500 less than the standard basic rate single persons allowance (currently £12570)?0 -
HMRC will let you know the total interest that has been reported to them, and you can ask them (by exception) for a breakdown by account, but the onus is on you to keep your own records, as otherwise you don't have any means of validating that the figures reported to (and then by) HMRC are correct.
If you owe tax as a result of interest earned in 2023/24 then this will be advised to you anytime now and your tax code adjusted in 2025/26 to collect that underpayment - HMRC may also tweak your 2024/25 coding on the assumption that you'll earn similar interest this year.
If you don't already access your online personal tax account, this can be helpful in seeing what figures are being used and adjusting expected ones if you know better than HMRC about your likely income for the current year.2 -
I reckon hmrc are getting pretty accurate data from providers as hmrc want my payment on account in jan to be pretty spot on. I have only submitted sa forms for ages and this tax year my savings income has risen a lot, thanks to this forum.0
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My own HMRC account currently states that the amount of tax owed is normally calculated between June and October, yet also goes on to tell me that, even tho it's now a third into December, the calculations have not been completed yet 🤷♂️
I want to pay mine off to avoid my Tax Code being messed with.0 -
wiseonesomeofthetime said:My own HMRC account currently states that the amount of tax owed is normally calculated between June and October, yet also goes on to tell me that, even tho it's now a third into December, the calculations have not been completed yet 🤷♂️
I want to pay mine off to avoid my Tax Code being messed with.0 -
HMRC always adjust next year's tax code based upon the amount of interest reported to them for the financial year two years earlier. This the tax code for 2025/26 will include a deduction assuming that savings interest will be as reported to them for 2023/24.When interest rates are reducing, as presently expected, most of us will be paying too much tax as a loan to the treasury whilst our savings interest income is also being reduced.0
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Just a point about adjusted tax codes…..HMRC also give the option to pay the amount owed to them as a separate payment. I always opt to do this and there are some advantages in certain scenarios not to have your tax code adjusted etc. Some people also prefer this as an option.2
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Descrabled said:HMRC always adjust next year's tax code based upon the amount of interest reported to them for the financial year two years earlier. This the tax code for 2025/26 will include a deduction assuming that savings interest will be as reported to them for 2023/24.When interest rates are reducing, as presently expected, most of us will be paying too much tax as a loan to the treasury whilst our savings interest income is also being reduced.
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Descrabled said:When interest rates are reducing, as presently expected, most of us will be paying too much tax as a loan to the treasury whilst our savings interest income is also being reduced.
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