Pay underpaid tax now or leave it?

sansovino

I've just received a letter from HMRC saying that I underpaid tax in 2024-2025. This is because the amount of interest on savings they estimated I would receive in that year was less than the actual amount. They say I can pay £650 now or else they will take the amount out of my Civil Service pension by means of the tax code, during the tax year 2026-2027. My question is: would I be better to pay it now, or just let them take it every month next tax year? 

MeteredOut

Assuming the £650 you'd otherwise pay now is earning interest, you'll be slightly better off letting them change your tax code and paying it back over time. I'd be surprised if the interest benefit was any more than £20 though.

So, its really which feels better/easier for you.

Hattie627

If you pay it in a lump sum now. you will lose out on the interest you could gain on the money. On a pure economic basis, you would gain by leaving it to be taken monthly from your pension over the tax year starting April 2026. On the other hand, this will mean that your net monthly pension in 2026/27 will be less than it would otherwise be by about £50, so this may make budgeting more difficult.

sansovino

Thanks, both! That's what I thought, that HMRC are offering me an interest-free instalment plan, but I wasn't sure if there was some aspect I was unaware of. They've been taking overpaid tax monthly for the last 2 years, so I am used to it, and budget accordingly.

Bobblehat

I think one wise forum member replied to a similar question with something along the lines of ..... Why refuse an interest free loan by HMRC? Possibly they were talking about a larger tax bill than yours, so your gains may be smaller .... but it could still be a gain! I am letting my HMRC underestimated interested earnings be taxed by clawing back what is owed through my tax code. If it continues to rise to a worrying level (it shouldn't), I may bite the bullet and cough up directly, with only slight reluctance.

sansovino

The whole thing started after interest rates went up about 3 or 4 years ago, and my fairly modest savings started to earn interest over the allowance level. Each year HMRC understimated interest. 

eskbanker

sansovino said:

The whole thing started after interest rates went up about 3 or 4 years ago, and my fairly modest savings started to earn interest over the allowance level. Each year HMRC understimated interest. 

Presumably the savings aren't that modest if underpaid tax on the interest is £650?  Just to check, are you making the most use of tax shelters such as ISAs and SIPPs, albeit you'd still need to verify that tax-free returns there would exceed taxed interest from unsheltered accounts?

sansovino

eskbanker said:

sansovino said:

The whole thing started after interest rates went up about 3 or 4 years ago, and my fairly modest savings started to earn interest over the allowance level. Each year HMRC understimated interest. 

Presumably the savings aren't that modest if underpaid tax on the interest is £650?  Just to check, are you making the most use of tax shelters such as ISAs and SIPPs, albeit you'd still need to verify that tax-free returns there would exceed taxed interest from unsheltered accounts?

Compared to some people I know, a bit over £140K is not an awful lot to last me till I croak. I'm 73; my dad was 93 when he went. The calculation includes tax I owe HMRC for an earlier year. The figures are Estimated Untaxed Interest: £4668.00, actual Untaxed Interest: £5174.00. I moved 40K into a 4% ISA in March and April 2025 and plan to add 20K in April 2025 after the 5th. 

maman

Apologies for hijacking your thread but I'm in a similar position. I paid the extra tax due on savings interest immediately as a lump sum but HMRC changed my tax code anyway. ☹️

I assume it'll work out over time but they are basing it on the projection that I'll have the same interest this year. I know I won't because a large chunk of the savings was earmarked/spent on building work.

So, in my case, trying to pay it off didn't help much. 

eskbanker

maman said:

Apologies for hijacking your thread but I'm in a similar position. I paid the extra tax due on savings interest immediately as a lump sum but HMRC changed my tax code anyway. ☹️

I assume it'll work out over time but they are basing it on the projection that I'll have the same interest this year. I know I won't because a large chunk of the savings was earmarked/spent on building work.

So, in my case, trying to pay it off didn't help much. 

Surely the lump sum would have been for interest in a previous year, whereas the tax code change is for collecting the interest estimated to be earned in the current year?

maman

Yes @eskbanker. What I mean is they have adjusted the tax code for a similar sum of interest this year which I won't be having. I'd assumed they'd not change my tax code but let me pay a lump sum again when this year's interest was known. 🤔