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

clairec666

Dazed_and_C0nfused said:

clairec666 said:

Thanks both for your responses. Am I right in thinking that (if I wasn't doing self assessment) interest from 25/26 would be calculated by the end of the 26/27 tax year, and therefore tax wouldn't be paid until 27/28?

Yes, if you have PAYE income it's usually a 3 year cycle (with a check in year 4)

Year 1 = you earn the interest
Year 2 = HMRC review your tax position for year 1 and let you know if you have over or underpaid any tax
Year 3 = tax owed from year 1 is collected via your tax code of year 3
Year 4 = HMRC review your tax position for year 3 to check if the tax from year 1 has now been paid

Thank you - that makes things much clearer than the HMRC website. Useful to see it broken down into different tax years.

And I'm assuming the same cycle would apply if I'm doing self assessment as well? I.e. if I'd over- or under-calculated my interest from year 1, it would be checked in year 2 and then adjusted/paid in year 3?

surreysaver

It would probably be easier just for banks to pay interest net of tax, and for HMRC to give you a refund the following year 

Dazed_and_C0nfused

surreysaver said:

It would probably be easier just for banks to pay interest net of tax, and for HMRC to give you a refund the following year 

And better for Rachel Reeves as I suspect.

But George Osborne thought he knew better 😞 

clairec666

surreysaver said:

It would probably be easier just for banks to pay interest net of tax, and for HMRC to give you a refund the following year 

Yes, this thought occured to me too - I assumed there was a reason things are done the current way but couldn't think for the life of me what that reason was

Dazed_and_C0nfused

clairec666 said:

surreysaver said:

It would probably be easier just for banks to pay interest net of tax, and for HMRC to give you a refund the following year 

Yes, this thought occured to me too - I assumed there was a reason things are done the current way but couldn't think for the life of me what that reason was

https://www.theguardian.com/money/2015/mar/18/savers-budget-bonanza-osborne-cuts-tax-on-savings?

Good job the country no longer needs the money 😳

masonic

clairec666 said:

Dazed_and_C0nfused said:

clairec666 said:

Thanks both for your responses. Am I right in thinking that (if I wasn't doing self assessment) interest from 25/26 would be calculated by the end of the 26/27 tax year, and therefore tax wouldn't be paid until 27/28?

Yes, if you have PAYE income it's usually a 3 year cycle (with a check in year 4)

Year 1 = you earn the interest
Year 2 = HMRC review your tax position for year 1 and let you know if you have over or underpaid any tax
Year 3 = tax owed from year 1 is collected via your tax code of year 3
Year 4 = HMRC review your tax position for year 3 to check if the tax from year 1 has now been paid

Thank you - that makes things much clearer than the HMRC website. Useful to see it broken down into different tax years.

And I'm assuming the same cycle would apply if I'm doing self assessment as well? I.e. if I'd over- or under-calculated my interest from year 1, it would be checked in year 2 and then adjusted/paid in year 3?

I don't think so. If you declare too much interest then likely nothing will happen and you'll have overpaid tax. Whereas if you declare too little, HMRC may or may not spot this some years down the line. If they do and it's a genuine underpayment then as well as the tax there will be penalty interest to pay and potentially a fine.

When trying to understand why HMRC would not routinely question a figure submitted via self-assessment, you need to remember that HMRC's information comes from BBSI returns, which show interest credited to accounts, rather than interest arising for tax, so discrepancies are to be expected if interest is not accessible when credited. A discrepancy where the taxpayer's figure is lower does not automatically mean the taxpayer's figure is incorrect. In two of my previous returns, the figure I submitted would have been lower than that of the BBSI, and in the next year it would have been higher. This is because I was following SAIM2440 and held multi-year fixed term accounts where interest was compounded annually, but was inaccessible until maturity. Had I not been completing a tax return, I would have been liable to underpay tax if I just left HMRC to its own devices using BBSI return information, as it would have been distributed between the three years, one of which had some available PSA (though only a small amount).

clairec666

masonic said:

clairec666 said:

Dazed_and_C0nfused said:

clairec666 said:

Thanks both for your responses. Am I right in thinking that (if I wasn't doing self assessment) interest from 25/26 would be calculated by the end of the 26/27 tax year, and therefore tax wouldn't be paid until 27/28?

Yes, if you have PAYE income it's usually a 3 year cycle (with a check in year 4)

Year 1 = you earn the interest
Year 2 = HMRC review your tax position for year 1 and let you know if you have over or underpaid any tax
Year 3 = tax owed from year 1 is collected via your tax code of year 3
Year 4 = HMRC review your tax position for year 3 to check if the tax from year 1 has now been paid

Thank you - that makes things much clearer than the HMRC website. Useful to see it broken down into different tax years.

And I'm assuming the same cycle would apply if I'm doing self assessment as well? I.e. if I'd over- or under-calculated my interest from year 1, it would be checked in year 2 and then adjusted/paid in year 3?

I don't think so. If you declare too much interest then likely nothing will happen and you'll have overpaid tax. Whereas if you declare too little, HMRC may or may not spot this some years down the line. If they do and it's a genuine underpayment then as well as the tax there will be penalty interest to pay and potentially a fine.

You need to remember that HMRC's information comes from BBSI returns, which show interest credited to accounts, rather than interest arising for tax, so discrepancies are to be expected if interest is not accessible when credited. A discrepancy where the taxpayer's figure is lower does not automatically mean the taxpayer's figure is incorrect. In two of my previous returns, the figure I submitted would have been lower than that of the BBSI, and in the next year it would have been higher. This is because I was following SAIM2440 and held multi-year fixed term accounts where interest was compounded annually, but was inaccessible until maturity.

Ah, so this means the onus is on me to make sure I declare the correct amount. Obviously do not want to be overpaying tax, but also don't want to be fined for accidentally underpaying.

Shouldn't be too difficult because I don't have any 2-year fixes for example where the tax could be accessible in a different tax year from when it's paid. All my money is in ISAs or regular savers mostly with 1 year terms.

masonic

clairec666 said:

masonic said:

clairec666 said:

Dazed_and_C0nfused said:

clairec666 said:

Thanks both for your responses. Am I right in thinking that (if I wasn't doing self assessment) interest from 25/26 would be calculated by the end of the 26/27 tax year, and therefore tax wouldn't be paid until 27/28?

Yes, if you have PAYE income it's usually a 3 year cycle (with a check in year 4)

Year 1 = you earn the interest
Year 2 = HMRC review your tax position for year 1 and let you know if you have over or underpaid any tax
Year 3 = tax owed from year 1 is collected via your tax code of year 3
Year 4 = HMRC review your tax position for year 3 to check if the tax from year 1 has now been paid

Thank you - that makes things much clearer than the HMRC website. Useful to see it broken down into different tax years.

And I'm assuming the same cycle would apply if I'm doing self assessment as well? I.e. if I'd over- or under-calculated my interest from year 1, it would be checked in year 2 and then adjusted/paid in year 3?

I don't think so. If you declare too much interest then likely nothing will happen and you'll have overpaid tax. Whereas if you declare too little, HMRC may or may not spot this some years down the line. If they do and it's a genuine underpayment then as well as the tax there will be penalty interest to pay and potentially a fine.

You need to remember that HMRC's information comes from BBSI returns, which show interest credited to accounts, rather than interest arising for tax, so discrepancies are to be expected if interest is not accessible when credited. A discrepancy where the taxpayer's figure is lower does not automatically mean the taxpayer's figure is incorrect. In two of my previous returns, the figure I submitted would have been lower than that of the BBSI, and in the next year it would have been higher. This is because I was following SAIM2440 and held multi-year fixed term accounts where interest was compounded annually, but was inaccessible until maturity.

Ah, so this means the onus is on me to make sure I declare the correct amount. Obviously do not want to be overpaying tax, but also don't want to be fined for accidentally underpaying.
Shouldn't be too difficult because I don't have any 2-year fixes for example where the tax could be accessible in a different tax year from when it's paid. All my money is in ISAs or regular savers mostly with 1 year terms.

Yes, that should keep things simple. I set up a simple spreadsheet listing all of my accounts vs months of the tax year. When I add a new account I highlight the months in which I expect to receive interest and fill in the resulting table as payments come in (including where I have closed or refreshed an account early). This gives me a clear visualisation where I can spot any missing entries. When I am happy I can simply do a sum over the whole grid.

clairec666

masonic said:

clairec666 said:

masonic said:

clairec666 said:

Dazed_and_C0nfused said:

clairec666 said:

Thanks both for your responses. Am I right in thinking that (if I wasn't doing self assessment) interest from 25/26 would be calculated by the end of the 26/27 tax year, and therefore tax wouldn't be paid until 27/28?

Yes, if you have PAYE income it's usually a 3 year cycle (with a check in year 4)

Year 1 = you earn the interest
Year 2 = HMRC review your tax position for year 1 and let you know if you have over or underpaid any tax
Year 3 = tax owed from year 1 is collected via your tax code of year 3
Year 4 = HMRC review your tax position for year 3 to check if the tax from year 1 has now been paid

Thank you - that makes things much clearer than the HMRC website. Useful to see it broken down into different tax years.

And I'm assuming the same cycle would apply if I'm doing self assessment as well? I.e. if I'd over- or under-calculated my interest from year 1, it would be checked in year 2 and then adjusted/paid in year 3?

I don't think so. If you declare too much interest then likely nothing will happen and you'll have overpaid tax. Whereas if you declare too little, HMRC may or may not spot this some years down the line. If they do and it's a genuine underpayment then as well as the tax there will be penalty interest to pay and potentially a fine.

You need to remember that HMRC's information comes from BBSI returns, which show interest credited to accounts, rather than interest arising for tax, so discrepancies are to be expected if interest is not accessible when credited. A discrepancy where the taxpayer's figure is lower does not automatically mean the taxpayer's figure is incorrect. In two of my previous returns, the figure I submitted would have been lower than that of the BBSI, and in the next year it would have been higher. This is because I was following SAIM2440 and held multi-year fixed term accounts where interest was compounded annually, but was inaccessible until maturity.

Ah, so this means the onus is on me to make sure I declare the correct amount. Obviously do not want to be overpaying tax, but also don't want to be fined for accidentally underpaying.
Shouldn't be too difficult because I don't have any 2-year fixes for example where the tax could be accessible in a different tax year from when it's paid. All my money is in ISAs or regular savers mostly with 1 year terms.

Yes, that should keep things simple. I set up a simple spreadsheet listing all of my accounts vs months of the tax year. When I add a new account I highlight the months in which I expect to receive interest and fill in the resulting table as payments come in (including where I have closed or refreshed an account early). This gives me a clear visualisation where I can spot any missing entries. When I am happy I can simply do a sum over the whole grid.

Thanks. I've already set up my spreadsheet to assign interest to the appropriate tax year, along with various switching bonuses and suchlike which could tip me over the £1000 limit this year.

clairec666

More questions on timings etc. - when (if at all) do HMRC contact you with their interest calculations? Do they still do this even if you're already registered for self assessment (as I was from 24/25)?

Not sure why I'm thinking about this right now as it won't be applicable to me until after the end of the 25/26 tax year, i.e. SA deadline of January 2027. I like to get ahead of myself though!