Clarification on how HMRC adjust tax code for interest on savings for previous year

Larry_M

From what I've read my understanding is that HMRC use the previous year's interest on savings to estimate a figure for the current year and adjust the tax code accordingly. My question is how this works in the first year of going above the £1000 limit.

My situation (rough figures for illustration only) is that I will be retiring in March and so taking my (LGPS) pension from April 2026, but also taking a part of my AVC that will be above the 25% tax free limit. Assume my annual pension will be £25000 and I'll be taking £23000 of the AVC as taxable (i.e. taxed at 20%). Assume also that in the 2026/27 year I'll earn £5000 interest and this will be the first year above the £1000 limit.

Now, with the pension and taxable AVC I'll be up to £48000 of total taxable pay for 2026/27 i.e. only a couple of thousand short of the higher rate figure of £50271. So my question is, when it gets to 2027/28 will HMRC add the £5000 interest earned during 2026/27 to the original £48000 from that year and determine that I went into the 40% bracket and adjust the tax code accordingly? Or do they add the £5000 from 2026/27 to presumably an estimate of another £5000 for 2027/28 (?) and effectively adjust last year i(2026/27) in the current year (2027/28)?

Dazed_and_C0nfused

Larry_M said:

From what I've read my understanding is that HMRC use the previous year's interest on savings to estimate a figure for the current year and adjust the tax code accordingly. My question is how this works in the first year of going above the £1000 limit.

My situation (rough figures for illustration only) is that I will be retiring in March and so taking my (LGPS) pension from April 2026, but also taking a part of my AVC that will be above the 25% tax free limit. Assume my annual pension will be £25000 and I'll be taking £23000 of the AVC as taxable (i.e. taxed at 20%). Assume also that in the 2026/27 year I'll earn £5000 interest and this will be the first year above the £1000 limit.

Now, with the pension and taxable AVC I'll be up to £48000 of total taxable pay for 2026/27 i.e. only a couple of thousand short of the higher rate figure of £50271. So my question is, when it gets to 2027/28 will HMRC add the £5000 interest earned during 2026/27 to the original £48000 from that year and determine that I went into the 40% bracket and adjust the tax code accordingly? Or do they add the £5000 from 2026/27 to presumably an estimate of another £5000 for 2027/28 (?) and effectively adjust last year i(2026/27) in the current year (2027/28)?

As HMRC won't know about the £5,000 until after the 2026/27 tax year has ended they will include it in their end of the tax year calculation and give you credit for any extra tax deducted during the year, say because they had estimated your interest to be £1,500.

The tax underpaid for 2026/27 will then be included in the tax for 2028/29 (assuming you expect to get £25k,+ pension on a continuing basis).

Separately to that they will also update your 2027/28 tax code on the assumption you will receive £5,000 interest again in 2027/28.  That change to your 2027/28 tax code is nothing whatsoever to do with tax due for 2026/27, it is simply trying to keep your tax code for 2027/28 upto date.

Larry_M

Dazed_and_C0nfused said:

As HMRC won't know about the £5,000 until after the 2026/27 tax year has ended they will include it in their end of the tax year calculation and give you credit for any extra tax deducted during the year, say because they had estimated your interest to be £1,500.

The tax underpaid for 2026/27 will then be included in the tax for 2028/29 (assuming you expect to get £25k,+ pension on a continuing basis).

Separately to that they will also update your 2027/28 tax code on the assumption you will receive £5,000 interest again in 2027/28.  That change to your 2027/28 tax code is nothing whatsoever to do with tax due for 2026/27, it is simply trying to keep your tax code for 2027/28 upto date.

So any underpaid tax for 2026/27 won't be adjusted until the 2028/29 year i.e. two years behind? And the same time lag for subsequent years?

I am still unclear whether HMRC will include the interest paid during the 2026/27 year in the assessment of the tax bands and therefore tax for 2026/27. Specifically I will need to decide whether I will have to take slightly less taxable AVC to avoid going into the 40% tax band if they will take the interest for that year into account.

Dazed_and_C0nfused

Larry_M said:

Dazed_and_C0nfused said:

As HMRC won't know about the £5,000 until after the 2026/27 tax year has ended they will include it in their end of the tax year calculation and give you credit for any extra tax deducted during the year, say because they had estimated your interest to be £1,500.

The tax underpaid for 2026/27 will then be included in the tax for 2028/29 (assuming you expect to get £25k,+ pension on a continuing basis).

Separately to that they will also update your 2027/28 tax code on the assumption you will receive £5,000 interest again in 2027/28.  That change to your 2027/28 tax code is nothing whatsoever to do with tax due for 2026/27, it is simply trying to keep your tax code for 2027/28 upto date.

So any underpaid tax for 2026/27 won't be adjusted until the 2028/29 year i.e. two years behind? And the same time lag for subsequent years?

I am still unclear whether HMRC will include the interest paid during the 2026/27 year in the assessment of the tax bands and therefore tax for 2026/27. Specifically I will need to decide whether I will have to take slightly less taxable AVC to avoid going into the 40% tax band if they will take the interest for that year into account.

The key thing you seem to be overlooking is that HMRC use the prior year figures to keep the current tax code up to date.

So if you have £5,000 interest in 2026/27 then HMRC will normally use the £5,000 amount as an estimate for 2027/28, recalculating your tax code for 2027/28 in late summer/autumn 2027.

If your actual interest for 2027/28 turns out to be say £5,500 then normally you will have already paid the majority of the tax due so although there might be some extra to pay in 2029/30 it will be relatively small amount overall.

Taxable savings interest is just another source of income which needs to be taken into account so if you have say earnings of £48,000 and interest of £5,000 then unless you have large job related expenses, make Gift Aid donations or relief at source pension contributions you would be a higher rate payer.  And as such only the first £500 of interest will be taxed at 0%.

Larry_M

Dazed_and_C0nfused said:

Taxable savings interest is just another source of income which needs to be taken into account so if you have say earnings of £48,000 and interest of £5,000 then unless you have large job related expenses, make Gift Aid donations or relief at source pension contributions you would be a higher rate payer.  And as such only the first £500 of interest will be taxed at 0%.

Thanks. So if I'm understanding correctly HMRC will be including the interest paid during 2026/27 in their assessment of total taxable pay for that year, and therefore I think I should adjust the amount I take for the taxable AVC to ensure I don't go into the 40% bracket with the interest on the savings. Just thinking ahead as I didn't want to get caught out on this later.

clairec666

My situation is a little simpler than the OP, but I'd still like some clarification.

Basic rate tax payer, also have some self-employed income so filled in self assessment for the first time for the 24/25 tax year. My interest was less than £1000 so I didn't have to worry about that.

In 25/26 I'll probably earn around £1000 interest, possibly a little higher or a little lower. Rather than relying on my own calculations, can I get an accurate figure from HMRC once they have received information from the banks? And when do HMRC adjust your tax code if you owe tax on interest?

Dazed_and_C0nfused

Larry_M said:

Dazed_and_C0nfused said:

Taxable savings interest is just another source of income which needs to be taken into account so if you have say earnings of £48,000 and interest of £5,000 then unless you have large job related expenses, make Gift Aid donations or relief at source pension contributions you would be a higher rate payer.  And as such only the first £500 of interest will be taxed at 0%.

Thanks. So if I'm understanding correctly HMRC will be including the interest paid during 2026/27 in their assessment of total taxable pay for that year, and therefore I think I should adjust the amount I take for the taxable AVC to ensure I don't go into the 40% bracket with the interest on the savings. Just thinking ahead as I didn't want to get caught out on this later.

Yes, I'm at a bit of a loss as to why you think that wouldn't happen 🤔

If your income is less, or basic rate band more, due to pension contributions then you could have a larger 0% band (£1,000 instead of £500) and pay 20% not 40% tax on the interest.

Dazed_and_C0nfused

clairec666 said:

My situation is a little simpler than the OP, but I'd still like some clarification.

Basic rate tax payer, also have some self-employed income so filled in self assessment for the first time for the 24/25 tax year. My interest was less than £1000 so I didn't have to worry about that.

In 25/26 I'll probably earn around £1000 interest, possibly a little higher or a little lower. Rather than relying on my own calculations, can I get an accurate figure from HMRC once they have received information from the banks? And when do HMRC adjust your tax code if you owe tax on interest?

If you file a Self Assessment return never.

It is just part of your Self Assessment liability and whether that is collected via your tax code will depend on several factors, some of which are,

When you file your return (30 December being the deadline). 

How you answer the question on the return about collection of any tax owed. 

How much is owed under Self Assessment

Whether your tax code could support collection of the tax owed (HMRC have rules which limit what can be included in your tax code).

masonic

clairec666 said:

My situation is a little simpler than the OP, but I'd still like some clarification.

Basic rate tax payer, also have some self-employed income so filled in self assessment for the first time for the 24/25 tax year. My interest was less than £1000 so I didn't have to worry about that.

In 25/26 I'll probably earn around £1000 interest, possibly a little higher or a little lower. Rather than relying on my own calculations, can I get an accurate figure from HMRC once they have received information from the banks? And when do HMRC adjust your tax code if you owe tax on interest?

Some phone HMRC to compare notes. I never have. Your records may be more accurate as HMRC may not have received all of the data, and may have made incorrect assumptions about when the interest arises for tax.

I usually just pay what I owe rather than make my tax code any more difficult to understand. Though I suppose turning down a delay to pay it isn't very MSE.