Help with tax code/untaxed savings interest

SneaksyWhippet

In February I was notified of a change to my tax code; there was a new deduction of £242 for "Untaxed interest on savings and investments".

From my own records I calculated I'd have earned ~£750 in interest by the end of the tax year and I've always been a basic rate tax payer. Unable to get through to HMRC at the time, I assumed it was probably them predicting I'd pass the threshold into being a higher rate tax payer for the 2024/25 tax year (possibly due to having an extra bonus from my employer for Christmas), therefore my tax free interest allowance would be reduced to £500 from £1000. I guess this is where the £242 might have come from: the amount I would earn in interest over the £500 tax free limit they anticipated I would have?

I've now had my P60. It states my final tax code for the year as 1177LM1.

Am I correct that this means my total earnings for the year could be up to £11,770 + £37,700 = £49,470 before entering the higher rate tax band?

My income amount on the P60 is under this amount; does this mean I remained a basic rate tax payer for 2024/25, and in fact the £242 untaxed interest deduction shouldn't have been included, and my tax code for 2024/25 should actually have been £11,770 + £242 = 1201 or thereabouts? Please tell me if I've worked this out incorrectly as I'm new to it all!

The issue is that on my new tax code for 2025/26, it already has a deduction due to supposed underpayment of tax in 2024/25. However I don't think I did underpay tax for the year, if my above calculations are correct.

Moving into 2025/26 it is likely that I WILL be a higher rate tax payer, so I've already addressed the savings interest issue using ISAs to get my expected taxable interest this upcoming year below £500. Does this mean I should alter the "untaxed interest from savings" amount in my tax code deductions? If so, do I reduce it to 0 as none would be taxed? The question on the online form seems to be asking the total amount you expect to make in interest, not just the amount over the threshold. Do I enter the total amount and they work out any deductions from that, based on whether they're predicting I'll be a higher or basic rate tax payer?

I tried to call them today but was cut off after being on hold for nearly an hour. I just want to make sure I'm understanding correctly, so I can ask the right questions if I do need to call them. Or if I've misunderstood and don't need to call them, because what they've calculated is correct, I need to know that too!

Thanks in advance for any help.

Dazed_and_C0nfused

SneaksyWhippet said:

In February I was notified of a change to my tax code; there was a new deduction of £242 for "Untaxed interest on savings and investments".

From my own records I calculated I'd have earned ~£750 in interest by the end of the tax year and I've always been a basic rate tax payer. Unable to get through to HMRC at the time, I assumed it was probably them predicting I'd pass the threshold into being a higher rate tax payer for the 2024/25 tax year (possibly due to having an extra bonus from my employer for Christmas), therefore my tax free interest allowance would be reduced to £500 from £1000. I guess this is where the £242 might have come from: the amount I would earn in interest over the £500 tax free limit they anticipated I would have?

I've now had my P60. It states my final tax code for the year as 1177LM1.

Am I correct that this means my total earnings for the year could be up to £11,770 + £37,700 = £49,470 before entering the higher rate tax band?

My income amount on the P60 is under this amount; does this mean I remained a basic rate tax payer for 2024/25, and in fact the £242 untaxed interest deduction shouldn't have been included, and my tax code for 2024/25 should actually have been £11,770 + £242 = 1201 or thereabouts? Please tell me if I've worked this out incorrectly as I'm new to it all!

The issue is that on my new tax code for 2025/26, it already has a deduction due to supposed underpayment of tax in 2024/25. However I don't think I did underpay tax for the year, if my above calculations are correct.

Moving into 2025/26 it is likely that I WILL be a higher rate tax payer, so I've already addressed the savings interest issue using ISAs to get my expected taxable interest this upcoming year below £500. Does this mean I should alter the "untaxed interest from savings" amount in my tax code deductions? If so, do I reduce it to 0 as none would be taxed? The question on the online form seems to be asking the total amount you expect to make in interest, not just the amount over the threshold. Do I enter the total amount and they work out any deductions from that, based on whether they're predicting I'll be a higher or basic rate tax payer?

I tried to call them today but was cut off after being on hold for nearly an hour. I just want to make sure I'm understanding correctly, so I can ask the right questions if I do need to call them. Or if I've misunderstood and don't need to call them, because what they've calculated is correct, I need to know that too!

Thanks in advance for any help.

No, ignore your tax code allowances, they are of no real relevance now the tax year has ended.

What have you calculated your total taxable income to be for 2024-25?  This is taxable earnings earnings, company benefits, untaxed interest etc.  Do not deduct either £500 or £1,000 when calculating the interest to be included in this total.

Can you provide the breakdown of the 1177L code as although the 1177L doesn't mean anything now the breakdown might be relevant.

SneaksyWhippet

Dazed_and_C0nfused said:

SneaksyWhippet said:

In February I was notified of a change to my tax code; there was a new deduction of £242 for "Untaxed interest on savings and investments".

From my own records I calculated I'd have earned ~£750 in interest by the end of the tax year and I've always been a basic rate tax payer. Unable to get through to HMRC at the time, I assumed it was probably them predicting I'd pass the threshold into being a higher rate tax payer for the 2024/25 tax year (possibly due to having an extra bonus from my employer for Christmas), therefore my tax free interest allowance would be reduced to £500 from £1000. I guess this is where the £242 might have come from: the amount I would earn in interest over the £500 tax free limit they anticipated I would have?

I've now had my P60. It states my final tax code for the year as 1177LM1.

Am I correct that this means my total earnings for the year could be up to £11,770 + £37,700 = £49,470 before entering the higher rate tax band?

My income amount on the P60 is under this amount; does this mean I remained a basic rate tax payer for 2024/25, and in fact the £242 untaxed interest deduction shouldn't have been included, and my tax code for 2024/25 should actually have been £11,770 + £242 = 1201 or thereabouts? Please tell me if I've worked this out incorrectly as I'm new to it all!

The issue is that on my new tax code for 2025/26, it already has a deduction due to supposed underpayment of tax in 2024/25. However I don't think I did underpay tax for the year, if my above calculations are correct.

Moving into 2025/26 it is likely that I WILL be a higher rate tax payer, so I've already addressed the savings interest issue using ISAs to get my expected taxable interest this upcoming year below £500. Does this mean I should alter the "untaxed interest from savings" amount in my tax code deductions? If so, do I reduce it to 0 as none would be taxed? The question on the online form seems to be asking the total amount you expect to make in interest, not just the amount over the threshold. Do I enter the total amount and they work out any deductions from that, based on whether they're predicting I'll be a higher or basic rate tax payer?

I tried to call them today but was cut off after being on hold for nearly an hour. I just want to make sure I'm understanding correctly, so I can ask the right questions if I do need to call them. Or if I've misunderstood and don't need to call them, because what they've calculated is correct, I need to know that too!

Thanks in advance for any help.

No, ignore your tax code allowances, they are of no real relevance now the tax year has ended.

What have you calculated your total taxable income to be for 2024-25?  This is taxable earnings earnings, company benefits, untaxed interest etc.  Do not deduct either £500 or £1,000 when calculating the interest to be included in this total.

Can you provide the breakdown of the 1177L code as although the 1177L doesn't mean anything now the breakdown might be relevant.

Thanks for your reply!

To answer your questions...

Total taxable income for 2024-25 was:

£49,220.50 (salary/bonuses)
£678 (interest earned in accounts that aren't ISA/LISA) - this figure is based on a search from my own records; I haven't seen what figure HMRC have for how my interest I earned.

My pension is relief at source.



The 117LM1 tax code breakdown was:

Personal allowance £12,570
+ £312 (working from home tax relief)
- £870 (health and dental insurance)
- £242 (untaxed interest on savings and investments)


The breakdown of my current 1152L tax code is:

Personal allowance £12,570

+ £312 (working from home tax relief)

- £920 (health and dental insurance)

- £242 (untaxed interest on savings and investments
- £200 (underpayment of £80 from previous year)

Thank you for any advice!

SneaksyWhippet

Seeing that written out I'm now wondering if they add your interest earnings onto your other income first, to determine if you're a basic or higher rate tax payer, rather than just basing it on the other income 😕

eskbanker

SneaksyWhippet said:

Seeing that written out I'm now wondering if they add your interest earnings onto your other income first, to determine if you're a basic or higher rate tax payer, rather than just basing it on the other income 😕

Yes, that's how it works - all non-ISA interest is taxable income, even if some of it ends up being taxed at 0%.

SneaksyWhippet

eskbanker said:

SneaksyWhippet said:

Seeing that written out I'm now wondering if they add your interest earnings onto your other income first, to determine if you're a basic or higher rate tax payer, rather than just basing it on the other income 😕

Yes, that's how it works - all non-ISA interest is taxable income, even if some of it ends up being taxed at 0%.

OK, so my total income, in terms of working out whether I'm a higher rate tax payer or not, is £49,250 (salary/bonuses) plus £678 (interest earned outside of an ISA) = £49,928?

And because my personal allowance has some reductions due to medical insurance, the fact that my total income is greater than my personal allowance + £37,700 means I'm a higher rate tax payer?

If that's the case, do I need to do a tax return to claim the extra tax for my relief at source pension?

🥴

eskbanker

SneaksyWhippet said:

OK, so my total income, in terms of working out whether I'm a higher rate tax payer or not, is £49,250 (salary/bonuses) plus £678 (interest earned outside of an ISA) = £49,928?

And because my personal allowance has some reductions due to medical insurance, the fact that my total income is greater than my personal allowance + £37,700 means I'm a higher rate tax payer?

No, your personal allowance will still be £12,570, even though there are some adjustments to your PAYE codings.

SneaksyWhippet

eskbanker said:

SneaksyWhippet said:

OK, so my total income, in terms of working out whether I'm a higher rate tax payer or not, is £49,250 (salary/bonuses) plus £678 (interest earned outside of an ISA) = £49,928?

And because my personal allowance has some reductions due to medical insurance, the fact that my total income is greater than my personal allowance + £37,700 means I'm a higher rate tax payer?

No, your personal allowance will still be £12,570, even though there are some adjustments to your PAYE codings.

But the amount I can earn before becoming a higher rate tax payer is £12,570 +/- adjustments (WFH, health insurance etc) + £37,700? And that "amount I earn" includes taxable interest as well as my salary/bonuses?

molerat

PAYE will deduct higher rate tax on any amount above your coded allowance + £37700 but that does not necessarily make you a higher rate taxpayer.  You may be having higher rate tax deducted to pay the correct amount of standard rate, that still will not make you a higher rate tax payer

If you are actually a 40% tax payer and making RAS pension payments then you need to inform HMRC via the on line form, no need for SA.  https://www.gov.uk/guidance/claim-tax-relief-on-your-private-pension-payments

LL_USS

I am interested to see how saving interest is taken into the tax code adjustment. Please update the result after you check with HMRC, @SneaksyWhippet . Hope it is just them making a mistake.

When I called and asked them about a change in my tax code, it was indeed a mistake from their side and they fixed it right away the month after (putting back some money and thus my tax that month was reduced).

As I understand (from the HMRC woman on the phone) ALL of our incomes are put together in their record: taxable pay (i.e. after pension contribution) from your work, any additional income, for e.g. gross external examination fee for me (before tax, and this is taxed from source before it reaches my account) etc. So I suppose the interest outside of ISA (in your case, ful £750) is included in this number. If the total number is still under the 40% tax threshold then you are not taxed further on the saving interest. If it's just spilling over to the 40% band then for the year after, they put the untaxed saving interest over to next year, perhaps?

LL_USS

PS: this is the HMRC number I called 0300 200 3300